US-China Talks Spark Optimism; Betting Markets See Recession Odds Drop

US-China Trade Meeting Sparks Wall Street Optimism

Monday, stocks soared on news that the red-hot, escalating trade war between the US and China had thawed as parties from each side announced that negotiators had made significant progress.

Meanwhile, the world’s two largest economies issueda rare, joint statement. Both Chinese and US stocks like Tesla (TSLA), Alibaba (BABA), and Amazon (AMZN) applauded the news and gapped higher to start the week. Below are four reasons the long-term trend has changed and bulls are in control:

Betting Markets Suggest that 2025 Recession Odds Plunge

Betting markets like Polymarket exploded during the 2024 presidential election, with users betting on everything from politics to markets. While several legacy polls were inaccurate in their predictions, betting websites like Polymarket were accurate and correctly predicted that Donald Trump would win a second White House term.

One of the more interesting markets that Polymarket offers is the US recession in 2025 market. During the April market mayhem, Polymarket put the odds of a recession at 66%. However, in just under two weeks, the Polymarket recession odds have plunged from a 66% to a 39% chance of a recession in 2025.

S&P 500, Nasdaq Retake 200-day Moving Average

Monday’s price action was rare. The day’s action marked the first instance since November 9^th 2020 where the S&P 500 Index ETF (SPY) opened 3% or higher on a Monday morning. Back then, the Pfizer (PFE) COVID vaccine was announced calming market fears about a further spread of the pandemic. This time, thawing relations are responsible. In addition to the powerful price action, SPY crossed back over its 200-day moving average – the best metric to measure the long-term trend.

What Does the VIX Reversion-to-the-Mean Tell Us?

The Cboe Volatility Index, or VIX, measures Wall Street’s volatility expectations in the S&P 500 Index over the next month. VIX spikes above $45 historically parallel moments of extreme fear and capitulation in US equity markets. For instance, the VIX spiked above $45 in the aftermath of the Global Financial Crisis of 2008 and in 2020 during the heat of the COVID-19 pandemic pandemonium. Since 1988, the VIX has cycled from above $45 to under $20 six times. In each instance, the S&P 500 Index gained 9 months and a year later.

In the aftermath of the recent tariff meltdown, the VIX has triggered this signficant VIX cycle again. Will history repeat itself in 2025?

The Trade-Deal Domino Effect

Now that the US has a preliminary deal with the UK and China, I expect the trade deal scoreboard to morph into a domino effect. With each new deal, President Trump and his team will gain more leverage, making subsequent deals happen quicker and more often. In addition, Fed Chair Jerome Powell will gain more insight into the inflationary situation and will be more likely to cut interest rates and buoy equity markets.

Bottom Line

A surprising thaw in US-China trade relations sparked significant optimism on Wall Street Monday. This positive development, coupled with lower recession odds, sets up a bullish outlook for investors. 

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This article originally published on Zacks Investment Research (zacks.com).

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