Last week, the White House announced what it called a “historic trade deal” with the United Kingdom. The S&P 500 (SNPINDEX: ^GSPC) closed higher on the news, but by only 0.6%. However, the Trump administration announced another trade deal on Monday with China. This time, the S&P 500 jumped nearly 3% — a much more encouraging gain.
Investors shouldn’t pop the corks on the champagne and begin singing “Happy Days Are Here Again” just yet, though. I predict that Trump’s China and U.K. trade deals won’t set the stage for a lasting stock market rally.
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Image source: White House Official Photo by Shealah Craighead.
The devil’s in the details
Importantly, the specifics of the trade deals with China and the U.K. haven’t been completely finalized. The adage that “the devil’s in the details” has never been more applicable.
The agreement with the U.K. is a framework for a deal. This framework includes keeping the 10% tariffs previously announced by the White House on most imports from the U.K. in place. The framework also will allow the U.K. to export up to 100,000 cars to the U.S. at a 10% tariff instead of the 25% rate the Trump administration has placed on other auto imports. However, the U.S. will eliminate tariffs on steel imports from the U.K.
In addition, the U.S. will have more open access to export agricultural products, ethanol, and machinery to Great Britain. But the framework didn’t address difficult details related to the British food standards. Neither did it include anything about the president’s threatened tariffs on pharmaceutical imports or foreign films.
There are fewer hard-and-fast details with China. The U.S. agreed to delay the worst of its tariffs against China for 90 days. Instead of 145% tariffs on Chinese imports, the level will be reduced (at least, temporarily) to 30%. In response to the Trump administration’s steep tariffs, China reciprocated with high tariffs on U.S. imports. Now, though, China will temporarily lower the tariffs to 10%. The two countries plan to continue discussions to achieve what U.S. Treasury Secretary Scott Bessent called “a more fulsome agreement.”
Economic pain is still on the way
The framework with the U.K. and the relaxation of tensions with China present an improvement from where things stood with both countries. However, economic pain is still likely on the way for many Americans and U.S. companies.
Importantly, the U.S. runs a trade surplus with the U.K. The two countries are close allies. Even with these positive factors in play, the Trump administration still plans to levy 10% tariffs on most U.K. imports. It’s hard to envision China (or most other major U.S. trading partners) getting any better terms than that.
The prices for many products will almost certainly increase, which will push the inflation rate higher. This could (and probably will) lead to lower U.S. consumer spending. When consumers spend less, the earnings of many companies take a hit. And as earnings go, so go stock prices.
Sure, the S&P 500 is no longer in correction. However, it’s still down 5% below the high set in February. I don’t think investors should get caught up in any irrational exuberance. The brunt of the tariffs that remain in place has yet to be felt. If and when inflation numbers rise and companies begin reporting weaker earnings, the stock market could easily fall yet again.
Investors’ best strategy
What should investors do in light of the China and U.K. trade deals and amid all the lingering uncertainty? The best strategy, in my view, is to simply think long term. Although I don’t expect these deals to ignite a strong stock market rally, stocks will eventually bounce back in a sustained way.
Timing the market is next to impossible. Instead, consider using dollar-cost averaging to invest in exchange-traded funds (ETFs) or individual stocks. Only buy the stocks of strong businesses with solid growth prospects over the next 10 years and beyond. Make sure the stock valuations are reasonable relative to those growth prospects. If you follow these steps, you should be able to successfully navigate the current choppy stock market waters.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
