‘Stocks Rattled By Tariff Fears’ & A Jobs Report; ‘Reason For Optimism: Bearish Investors;” “A Top Wall Street Strategist Makes The Case For Technology & Financial Stocks”
Avi Salzman wrote in this weekend’s (April 9, 2018) Barron’s, that “before Thursday evening [last week], around 7 p.m., stocks were on an uptrend, after closing higher three days in a row. Then came a directive from the White House, asking staff to find $100 billion worth of Chinese goods to hit with tariffs. Suddenly the trade “not a war,” was back in the headlines; and, stocks went back, [well] into the red. On Friday alone,” Mr. Salzman wrote, “the DOW fell 572 points.
The Trump White House, and their defenders, have made numerous statements that these are “proposed tariffs,” and nothing has gone into effect as yet. In the words of White House Trade Representative Peter Navarro [and a known China critic], “the [stock] market needs to…..chill out.”
But, the market is as much about sentiment and psychology as it is earnings and profits. And, even though these tariffs may never be implemented, the damage has been, and is being done. Analysts, traders, and institutions are paid to anticipate and price in good, or bad news. As these tit-for-tat tariff proposals are announced, the fear factor goes up regarding a potential trade war, and a cascading, metastasizing trade war. I am also reminded about the importance of perception versus what is reality.
In a now famous exchange at the Paris Peace Accords Conference to end the Vietnam War, then Colonel (U.S. Army) Harry Summers, who was part of the staff support to Secretary of State Henry Kissinger approached his North Vietnamese counterpart during a break in the discussions. Col. Summers said to his counterpart, a North Vietnamese Colonel, “You know you [you guys] never defeated us [the U.S] on the battlefield. The North Vietnamese Colonel thought for a moment before responding, “That may be true; but, it is also irrelevant.” The market is essentially saying the same thing with respect to tariffs: “The tariffs haven’t been approved/implemented yet; but, that is also irrelevant,” to play on Colonel Summers words. As Randall Forsyth noted in this weekend’s Barron’s, “the specter of a trade war still looms over the [U.S.] agricultural sector; not just farmers, but also equipment dealers and banks in the Farm Belt.”
“For the week,” Mr. Salzman wrote, “the DOW lost 170 points, or 0.7 percent to 23, 932 points; while the S&P 500 closed down 36 points or 1.4 percent, to close at 2,604 points; while the tech-heavy NASDAQ fell 148 points, to close down 2.1 percent, to 6,915 points.” Mr. Salzman added that “the DOW is down 10.1 percent from its January closing high, [and] technically in correction territory.”
Year-to-date, the DOW is down 3.18 percent; while the S&P 500 is down 2.6 percent; and the NASDAQ is on life support at just +0.17 percent.
True, tariffs weren’t the only negative news from Friday morning. The jobs report for March showed an increase of the net new jobs created in the U.S. was an anemic, 103,000, as opposed to consensus expectations of something in the neighborhood of 178,000. Wage growth, which the Federal Reserve watches closely for its potential impact on inflation — is up 2.7 percent percent — on a year-over-year basis.
“Reason For Optimism: Bearish Investors”
The above title is from an article in this weekend’s (April 7/8) Wall Street Journal (WSJ), by Riva Gold. She begins with an important observation: “Investor sentiment has quickly shifted from extremely optimistic, to outright bearish — an encouraging contrarian signal for those market participants who have long worried that Wall Street was overly bullish.”
“As concerns about trade and technology stocks heat up, investors are at their most pessimistic in more than seven months,” according to the American Association of Individual Investors most recent weekly survey — which measures participants’ outlook for the stock market over the next six months. In January,” Ms. Gold noted, “survey participants were at their most bullish since late 2010,” for many, an obvious sell signal. The overly bearish sentiment now — is for many — a buy signal.
“There’s more of an extreme fear reaction now,” said Edmund Shing, Global Head of Equity Derivative Strategy at BNP Paribas. “As a contrarian indicator, that makes me actually bullish,” he told the WSJ. Mr. Shing added that “signals from options markets, equity flows, and sentiment gauges, are collectively the most downbeat he has seen since shortly before the U.S. Presidential election in November 2016.”
Randy Frederick, Vice President of Trading at The Schwab Center for Financial Research, told the WSJ that “I’d expect the put-call ratio [on the S&P 500] to be a lot higher than it is now — if there were concern of a much bigger downturn.”
“With investor optimism lower now, it should be easier for equity markets to make further gains from here — if global growth remains healthy,” said Mike Bell, Global Market Strategist at J.P. Morgan Asset Management.
I agree with the contrarian view and think this is a great buying opportunity. But, no one knows where the bottom is; and, as the old saying goes, “the market can stay irrational longer than you can stay solvent.” If the tariff ‘trade war’ with China continues to heat up or linger, this will be a definite headwind for equities. One saving grace is we’re about to get first quarter 2018 earnings and 2nd quarter/2nd half outlook from corporate America. If we get the kind of earnings beats that are expected, this market could rally in a swift, sharp way. But, the longer the tariff rift lingers, the more investors, analysts and institutions will be cautious about putting large cash positions to work. The most tried and true method of investing in a down market — short of precious metals, bear fund, etc. — is to leverage in — in portions of 5-20 percent or so, until you finally get the all clear signal.
“A Top Wall Street Strategist Makes The Case For Technology & Financial Stocks”
Reshma Kapadia had a lengthy interview in this weekend’s Barron’s with Savita Subramanian, U.S. Equity, and Quantative Strategist, Bank of America/Merrill Lynch. I refer you to Mr. Reshma’s article to read the full article, as I will try and summarize the key takeaways. Ms. Subrmanian’s bottom line: she is bullish, and thinks the S&P 500 index could rise another 14 percent — to 3,000 — propelled by strong growth in corporate earnings,” as noted by Mr. Reshma.
When asked “What do you want to own at this stage of the bull market?,” by Mr. Reshma, Ms. Subrmanian told Barron’s “technology and financials” were her favorite sectors. Ms. Subrmanian acknowledged that the technology sector “is tricky,” now, with FaceBook (FB), and Amazon (AMZN) under intense public, Congressional, and foreign scrutiny, but, she contends that “the technology sector still offers secular, and cyclical growth. It is the only sector with net cash on corporate balance sheets; and, it has become an interesting, dividend-growth story.”
When asked where she sees the biggest risk in this market?, Mr. Reshma noted she pointed to “so-called defensive, high-dividend yield stocks. Low-volatility funds are hugely overweight utilities, telecom, and real estate investment trusts. But, looking at the balance sheets, these are three of the most levered sectors in the S&P 500. Payout ratios are close to 100 percent, so there is no room to increase dividends; and, these companies have almost zero global diversification.”
When asked which sector “is the most crowded?,” she responded — “Consumer discretionary.”
My personal, favorite sector, is the bio-pharma sector, which I think could see a fair amount of mergers and acquisitions activity. But, investing isn’t without risk. That’s why it’s called gambling. Understand your risk tolerance, time horizon, and do your own due diligence — before taking a portfolio position. Otherwise, good luck. Now, to the Master’s. V/R, RCP, www.fortunascorner.com.