Death by China on the Way to Yes

Markets have become over-focused on risks we’ve been talking about for months – that China might fall into a disorderly recession under the stress of Trump’s tariffs, now amplified by the global revulsion at Huawei on security grounds. China’s slowing has contributed to the collapse in oil prices, which in turn explain most of the small rollover in forward earnings and widening of credit spreads. Stocks are very cheap, with the S&P 500 equity risk premium back to where it was at the 2016 presidential election, and forward multiples in an almost 20% bear market from cycle highs a year ago. Several Chinese gestures of surrender indicate that a deal will be done by the February deadline. The probability that some eccentric catalyst will arise that throws China into recession before then is very small – and when we get to “yes,” the restoration of confidence and a less-protectionist China should take all risks off the table.