Gill Capital Partners December 2019 Market Commentary

On behalf of the Gill Capital team, we want to wish you a happy holiday season! Thank you for your partnership and friendship. We look forward to the work we will do together in the New Year.

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What are we talking about at Gill Capital Partners?

Our Investment Committee meets regularly to review portfolio allocations, macro-economic events and our investment managers. Below are some areas that are currently top of mind within the Committee.

Market Update – Trade War Update

As we approach the end of 2019, U.S. equity markets are putting in fresh all-time highs on the back of strong fundamentals and positive movement on the trade war front. Below is a brief overview of the current status of the trade war, along with our thoughts on what it means for investors.

What Happened

·       The U.S. agreed to suspend the December 15th tariffs that would have impacted $160 billion of Chinese-made goods.

·       The U.S. agreed to cut the rate on existing tariffs from 15%, set in September, to 7.5%.

·       China agreed to purchase $200 billion of additional U.S. good over the next two years.

The deal does not address the more difficult issues, such as technology transfers, intellectual property, and various other regulations. And, while some tariffs have been halted or reduced, many others remain in effect. Still, equity markets have reacted positively to the news even though this deal is not comprehensive and does not address many key issues.

Our View:

There is no question that this represents an important de-escalation in the trade war, one that the markets have been desperately waiting for. However, the agreement lacks resolution in several important areas, and may be unrealistic in others. This potentially sets us up for a “hollow victory.” One of the key components of this “phase 1” deal is reducing September’s tariffs on Chinese goods by half, from 15% to 7.5%. In return, China has promised a “best effort” to purchase $40 billion in agricultural products from the U.S. While this sounds like a win-win, many believe these levels will never be achieved. The chart below, courtesy of our friends at Goldman Sachs, illustrates the issue nicely. $40 billion in agricultural exports in 2020 would translate into a 235% increase over 2019, and would be significantly higher than the all-time high level of agricultural exports.

While this sounds like a huge win for the U.S., the problem is twofold. First, other nations (mostly Latin American) have entered into new long-term agricultural contracts with China over the past year, which means China may be overcommitted. Second, it is highly improbable that U.S. agricultural exports can increase that significantly. These issues may render the “best efforts” deal largely unrealistic.

Conclusion

While not trying to pour cold water on the positive developments in the trade war, there are reasons to be skeptical. We recognize that this is the first phase of what could be a much broader deal, but the especially thorny negotiating points do not appear to have been addressed. However, we are happy to have positive news on the trade front and are hopeful that there is more good news to come. For the time being, the trade war is a tailwind for markets that are hitting on all cylinders.

As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.