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Stocks should rise a lot more if China and the U.S. strike a trade deal since that event is not fully priced into the market yet, according to a study conducted by Renaissance Macro Research.
The firm estimates the has lost about 11 percent from trade tensions since January 2018, even with the recent run-up in stocks. Renaissance Macro got to this amount by tallying up the single-day losses in the market over the last year that could be largely attributed to negative news on trade.
"In other words, if not for all the negative trade news over the last 14 months, the S&P 500 would be about 11 percent higher," said Neil Dutta, head of economics at Renaissance Macro Research, in a note.
China and the U.S. have slapped tariffs on billions of dollars worth of each other's goods. Investors around the globe have been fretting over this as tariffs can have a significant impact on corporate profits. The two countries have until early March to strike a deal to end the trade skirmish or additional U.S. tariffs on Chinese goods could take effect.
But stocks are up sharply this year in part because of perceived progress in the trade talks. The S&P 500 is up more than 10 percent in 2019. The index has also posted weekly gains in seven of the past eight weeks.
U.S. trade negotiators met with Chinese officials in Beijing last week and negotiations continue this week in Washington. Reuters reported earlier on Thursday the two countries are outlining commitments in principle on the stickiest issues in their trade dispute.
"With the market off its lows, a popular view is that the equity market has priced in all the good news already," Dutta said. "We are skeptical; the equity market only partially retraced the losses associated with trade tensions."
Perceived progress in U.S.-China trade talks are one of the factors cited by investors for the big move higher. Reports earlier on Thursday said negotiators from the two countries are outlining commitments in principle on the stickiest issues in their trade dispute.