Break on Through to the Other Side?
The agreement between the United States and China to slash tariffs for 90 days is good news. It de-escalates tensions, likely lifts a de facto trade embargo between the two countries, and reduces the chances of a U.S. recession in the near term. Now comes the hard part. The two countries begin work toward a real, long-term trade agreement. To what extent China will need to adjust its massive, export-driven economy remains to be seen, and progress in negotiations and results might not be linear.
Both sides walking back punishing tariffs was a big relief for global financial markets. The S&P 500 was up 3.3% on the day of the news. The question now is whether the market’s recent gains are sustainable.
One of the things we’ll be looking at is how the S&P 500 trades around its 200-day moving average (200 DMA), which is the average price of the index over its previous 200 trading days. Historically, the 200 DMA has often served as resistance (a level where a rising market has difficulty overcoming) or support (a level where a declining market can find footing). The exhibit shows the S&P 500 and its 200 DMA over the past five years, which illustrates the point.
Exhibit: The S&P 500 and Its 200-Day Moving Average
Source: StockCharts.com, Clayton Wealth Partners.
As of this writing, the S&P 500 has broken above its 200 DMA. But we’ll be looking for confirmation that it has durably broken through that resistance. In other words, we want to minimize the chances that it’s just a head fake and will return below the 200 DMA. (See late March 2025 for the most recent false move.) Here, we’ll be watching a combination of things, including how the markets close at the end of a week (which is usually more significant than a weekday close), a percentage buffer around the 200 DMA, and how long the S&P 500 has remained above it.
Bullish
- U.S.-China trade tensions have cooled with a temporary slash in tariffs.
- The Fed has made good progress in reducing inflation since 2022.
- The most attractive yields for fixed income and cash in years.
- Credit spreads remain contained.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Slowing global economic growth.
- Policy uncertainty is having a negative effect on consumer and business confidence.
- Housing affordability remains at a decades-low.
- Leading indicators of unemployment are generally trending down.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war, Middle East conflict, and other geopolitical concerns.
- China is experiencing a growth recession, with deflation fears growing.
- Federal debt and deficits have ballooned.