President Trump campaigned in 2016 on making the US Dollar weak again to reduce the endless wave of record trade deficits with China. Clearly, he delivered on that pledge throughout 2017 as the Dollar Index fell 12% and devalued almost 11% against the Chinese Renminbi (Yuan).

While Trump delivered on the Dollar, the result thus far has been rising deficits with China and the world in 2017 and 2018. Our merchandise trade deficit with China hit a record $375 Billion in 2017 and appears certain to surpass $400 Billion for 2018. The Yuan has been appreciating against the Dollar the past couple of months, which should theoretically reduce China’s surplus as the Yuan appreciates. However, it’s unlikely we will witness a dramatic turn around in our balance of trade unless we enter a recession where nominal US imports fall much faster than exports. During most of 2018, the Yuan actually fell sharply on the prospects of a Trade War with the US and accelerating US growth. The recent rally in the Yuan – weaker Dollar – reflects slower US growth and the increasingly positive sentiment that the US and China will negotiate a deal in early 2019.

Our US stock market enjoyed the falling Dollar in 2017 when strong US and European growth accelerated, improving corporate earnings. Stocks rallied again in the 2nd and 3rd quarter of 2018 despite a stronger US Dollar as tax cut tailwinds and US GDP growth that far outpaced Europe.

The good news is most of the bad news has now been discounted. In the 4th quarter of 2018, it became apparent that US economic data and earnings would not be as strong as consensus had expected, sending our major stock indices down over 20% to more realistic multiples. Earnings consensus forecasts have fallen from over 10% growth as of last October to 6% today. So far in January, 75% of companies are reporting lower earnings guidance. A slower US economy in 2019 along with better-looking tea leaves from China on wanting a trade deal with the US have led to a 3% drop in our Dollar and a nice 12% pop in our stock market from the extreme panic low on Christmas day (night). The Fed robo rate hikes are no longer a major market concern until the economy reaccelerates and the other major anxiety surrounding a Trade War is subsiding. These are all signs that the downside risk for stocks is shrinking, allowing a more sustained rally by the end of the 1st quarter. Short term we expect a January peak in stocks to be followed by an important higher low in February where another round of investing can begin. Eventually, our stock market will need a stronger Yuan and weaker Dollar before it can sustain a rally back to its October 2018 peak.