President Donald Trump secured passage of "phase 1" of a trade deal last week which immediately sent stock prices higher. It validates the strength in equities over the past two and a half months which rallied on positive headlines and barely dropped on any negative news.
Questions linger over the deal and it's not yet signed. It's clear what China got out of "phase 1" - the U.S. didn't raise tariffs on $320 billion of Chinese goods and reduced tariffs on $120 billion of goods. What Trump is touting as China's end of the deal - increased IP protection, ending of technology transfers, the opening of financial services, and $50 billion in agricultural purchases lack details and enforcement mechanisms. It also seems unlikely that China capitulated on all of President Trump's demands.
Ideal Economic Conditions
Regardless for financial markets, risk assets rallied violently as it reduced the odds of an escalating trade war which would be brutal for growth and asset prices in the long-term. Clarity on the trade war could lead to a pent-up explosion in business investment that would flow through the economy over the next few months. It's also supportive of the recent bottoming in manufacturing.
Over the past two years, economic growth has decelerated primarily due to manufacturing and effects of the trade war. However, other large drivers of economic growth like housing, the labor market, and consumer spending remained in growth mode over this period. If manufacturing turns positive, overall growth will likely go from deceleration to acceleration in the second half of 2020.
Of course, this lines up ideally for Trump's reelection. The strong economy will be Trump's best argument for reelection. Another boost is that the Federal Reserve is basically on the sidelines until inflation is "persistently" above target. Further, the Fed is not likely to raise rates following a year of cutting rates in the middle of an election season, especially as it strives to retain its institutional credibility and nonpartisan ethos.
Election Odds
Based on betting odds, Trump is heavily favored to win reelection. He is at even odds to win, while his closest opponent is Joe Biden at six to one odds. The next three are Elizabeth Warren, Bernie Sanders, and Pete Buttigieg at nine to one odds. His odds have modestly improved in the past couple of months given that impeachment hearings are failing to capture the nation's attention, booming stock market, and progress in trade talks.