U.S. Stocks Surge on Trade Talk Hopes, but What is Best Outcome for Investors?

After chopping around most of the session, the major U.S. stock indexes took off shortly before the close after a Chinese official reportedly said the United States and China are finding common ground on trade ahead of a crucial meeting between President Donald Trump and Chinese President Xi Jinping. The news was strong enough to rattle a few of the weaker short-sellers and draw the attention of some aggressive speculators, helping to erase earlier losses.

In the cash market, the benchmark S&P 500 Index settled at 2758.12, up 20.36 or + 0.74%. The blue chip Dow Jones Industrial Average closed at 25519.84, up 181.00 or +0.71% and the tech-based NASDAQ Composite finished at 7324.96, up 51.48 or +0.71%.

According to Reuters, a Chinese official said, “consensus is steadily increasing” in U.S.-China trade talks. The official added, according to the report, that differences between the two countries remained.

This week-end’s G20 timeline shows that Trump and Xi are scheduled to have dinner on Saturday and are expected to discuss trade issues between the two countries. Some investors are saying that the outcome of the dinner could determine whether there is a trade deal.

U.S. Trade Representative Robert Lighthizer was also optimistic that a deal could be struck, saying he expected the meeting to be a “success.”

Outcome of Meeting Could Determine Whether Stock Market Ends Year Higher or Lower

The meeting this week-end between Trump and Xi is very important to stock traders because the outcomes could trigger either an “explosion to the upside” or a “bear market.” Furthermore, the U.S. and China need this deal to get done because the current trade dispute is causing economic issues for both economies.

Not only will the outcome determine the direction of the markets, but it will also determine the size of the reaction by investors. It all depends on whether there is a complete dismantling of the trade tariffs, or only a truce, or ceasefire by both parties.

The most desirable deal for investors would be one that puts all tariffs on hold while the U.S. and China continue negotiations. The best solution will be if all the tariffs were rolled back.

However, there is still some potential downside. For example, if there is a truce that holds off other tariffs, the existing ones would continue to have a negative effect on corporate earnings and the global economy.

The worst case would be if talks failed altogether. However, this outcome is considered highly unlikely but potentially very negative for the stock market.

If you’re handicapping the outcome and the reaction in which the two sides plan further talks without halting a plan to increase the China tariffs to 25 percent in January then Strategas puts that as the most likely outcome, with 40 percent odds.