Long-term investors are accustomed to assessing risk. After all, investment rewards are related to the risks involved.
Risk comes in many forms. This week investors will focus on two: economic and military.
First, this is the week President Trump is scheduled to welcome China’s top trade negotiator back to the White House. The two are expected to sign the first phase of a trade deal on Wednesday.
This would mark the first significant pact between the world’s largest economies since they began trading tariffs almost two years ago. The reality of the trade war has been a risk investors have been willing to take. Two years of building tensions have been a concern of economists and the Federal Reserve but not of investors. Stocks have continued to hit record highs even as import taxes were threatened and instituted.
The signing of phase one of a trade deal between the U.S. and China may seem to reduce the risk of economic warfare. However, reaching this stage sets investor expectations for further progress. Just what that means and when remain unknowns. Even before this first phase is signed, President Trump said he might want to wait until after the election to finish the next phase. Investors are on notice: The trade risks remain.
Second, just as fast as investors were reminded about geopolitical tensions between the U.S. and Iran, those fears disappeared in the days that immediately followed.
Late in the week, oil futures fell below where they were trading before a U.S. drone killed a top Iranian general and Iran responded by launching missiles against three American military bases in Iraq. Gold prices, which tend to spike during times of worry, also quickly fell back.
As important as the cooler rhetoric is, further retaliation like a taunting tweet (or worse) would whip up investor worries fast.
In the week ahead, investors will decide just how convinced they are that these risks are being reduced.