A Sixth Grader’s Handling of the Trade War and Deals
I may or may not have explained how market expectations work to you. Either way, its always a good lesson, so I’m going to go through it with you today.
Remember when you were a kid in school (or when you had kids in school)? I had a rule that I started using – I don’t know, maybe in the sixth grade?
You see, that was around the age where you started being held accountable for your grades in my parent’s house. If you did well in school you were rewarded… do poorly and you were grounded or some other punishment. Do well and it was special pizza dinners and other fun things.
You quickly learned how to manage expectations as a sixth grader in our house. I never boasted or bragged about having good grades halfway through the school semester, just indicated that I thought things were going “OK”.
I also learned fast that if I was struggling with a class or two that might result in a couple of bad grades I had to set the expectations low. You know… “man, this class is really hard Mom, I’m not sure how its going to turn out”. That type of talk.
Bottom line, I was under promising and then overperforming in both cases. It meant that I could get that special pizza dinner for bringing home a “C” or two because my parents expected worse because I set the expectations low, all the time.
Why the hell am I bringing this up? Because every opportunity that the White House Administration has had to manage expectations on the trade war progress has been blown, at least in my humble opinion.
The market’s reaction to the deal today is a perfect example. Most analysts are calling for a 5-10% rally when the phase one deal is signed. Well, its signed now and stocks are heading lower. The simple answer as to “why?” is that the administration has been over-promising, basically telling us that the deal is going to be great. That’s like me telling my parents “there’s no way I bring home anything less than an “A+” in calculus. Just this morning the President tweeted that it’s a “phenomenal deal”.
Now, the terms of the signed deal today are uncertain. We’re reading about tariffs coming off in stages, no quantities being indicated on the agricultural purchases by China, etc… The deal, as we see it now, is a “C” when we were expecting to see an “A+” or something “Phenomenal”. Guess what… no pizza party, and traders are now going to sell stocks as the market was priced for higher expectations (an “A+) from the phase one deal.