The future of U.S. financial markets depends on two major variables: the eventual outcome of the U.S.-China trade dispute and Federal Reserve interest rate policy, specifically how soon and how much the central bank cuts.
Those are two of the biggest takeaways from Schwab’s midyear market outlook webcast with its chief investment strategists and officers for stocks and bonds.
“Trade is the most important needle mover” concerning the timing of the next U.S. recession, which is a “100%“ certainty, said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.
Markets could learn as early as this weekend how far and what direction that needle will move when President Donald Trump and China’s President Xi Jinping meet on the second day of the Group of 20 summit in Osaka, Japan, this Saturday.
Failure of the talks could well be followed by the U.S. imposing 25% tariffs on $300 billion worth of imports from China on top of the 25% tariffs it has already imposed on $250 billion worth of Chinese goods. China has retaliated with tariffs of its own on about $110 billion worth of U.S. imports.
If U.S.-China trade conflict continues to deteriorate, then “a major haircut” is expected among Wall Street analysts’ expectations, said Sonders. “The risk is on the downside.”
Failure of U.S.-China trade talks also increases the likelihood that the Federal Reserve will cut interest rates sooner than later. Fed Chairman Jerome Powell said as much after last week’s Fed policymaking meeting and on Tuesday in a speech to Council of Foreign Relations in New York.
“Crosscurrents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy,” said Powell. “Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened.”
Brett Wander, Schwab’s chief investment officer for fixed income, said the financial markets are now pricing in a Fed rate cut at its next meeting in late July followed by as many as two additional cuts through the rest of the year.
“It would be an absolute disaster if the Fed doesn’t cut rates and undermines its credibility. That would cause investors to panic and make for some very interesting tweets,” said Wander, referring to possibly more Trump tweets about Powell and the Fed.