I’ve just updated my Keeping Score page for November. …finally an up month!
The Trump administration has just triggered the latest round of tit-for-tat tariffs with China, declaring 10% duties on $200 billion of imports (the rate to be raised to 25% after the holiday shopping season). China has responded with tariffs on $60 billion of its imports from the US. Domestic firms affected by the Trump tariffs are already announcing price increases intended to pass on to consumers all of the new government levy.
It isn’t necessarily that simple, though. The open question is about market power. Theory–and practical experience–show that if a manufacturer/supplier has all the market power, then it can pass along the entire cost increase. To the degree that the customer has muscles to flex, however, the manufacturer will find it hard to increase prices without a significant loss of sales. If so (and this is the usual case), the company will be forced to absorb some of the tariff cost, lowering profits.
From an analyst’s point of view, the worst case is the one where a company’s customers are especially price-sensitive and where substitutes are readily available–or where postponing a purchase is a realistic option.
Looking at the US stock market in general, as I see it, investors factored into stock prices in a substantial way last year the corporate tax cut that came into effect in January. They seem to me to be discounting this development again (very unusual) as strong, tax reduction-fueled earnings are reported this year. However, the tax cut is going to be “anniversaried” in short order–meaning that reported earnings gains in 2019 are likely going to be far smaller than this year’s. The Fed will also presumably be continuing to raise short-term interest rates. Tariffs will be at least another tap on the brakes, perhaps more than that.
Because of this, I find it hard to imagine big gains for the S&P 500 next year. In fact, I’m imagining the market as kind of flattish. Globally-oriented firms that deal in services rather than goods will be the most insulated from potential harm. There will also be beneficiaries of Washington’s tariff actions, although the overall effect of the levies will doubtless be negative. For suppliers to China or users of imported Chinese components, the key issues will be the extent of Chinese exposure and the market power they wield.
PS Hong Kong-based China stocks have sold off very sharply over the past few months. I’m beginning to make small buys.
I’ve just updated my Keeping Score page for a surprisingly strong (to me, anyway) July. Sector rotation is the main message.
As far as US stock are concerned, I don’t know.
As/when the correction is over, however, it’s very important to look for signs of a leadership change. At a minimum, one former hot industry/sector typically grows ice cold; at least one former laggard heats up. Figuring this out and tweaking/reorienting your portfolio can make a big difference in this year’s returns.
prices equity investors watch
Investors who are not oil specialists typically use (at most) two crude oil prices as benchmarks:
—Brent, a light crude from under the North Sea. Today it is selling at just about $70 a barrel. “Light” means just what it says. Brent is rich in smaller, less-heavy molecules that are easily turned into high-value products like gasoline, diesel or jet fuel. It contains few large, denser molecules that require specialized refinery equipment to be turned into anything except low-value boiler fuel or asphalt. Because it can be used in older refinery equipment that’s still hanging around in bunches in the EU, it typically trades at a premium
—West Texas intermediate, which is somewhat heavier and produced, as the name suggests, onshore in the US. It is going for just under $64 a barrel this morning.
What’s remarkable about this is that we’re currently nearing the yearly low point for crude oil demand. The driving season–April through September–is long since over. And for crude bought, say three weeks from now, it’s not clear it can be refined into heating oil and delivered to retail customers before the winter heating season is over.
Yet WTI is up from its 2017 low of $45 a barrel last July and from $57 a barrel in early December. The corresponding figures for Brent are $45 and $65. (Note that there was no premium for Brent in July. I really don’t know why–some combination of traders’ despair and weak end user demand in Europe.)
why the current price strength?
Several factors, most important first:
–OPEC oil producers continue to restrain output to create a floor under the price
–they’re being successful at their objective, as the gradual reduction of up-to-the-eyeballs world inventories–and the current price, of course–show
–the $US is weakening somewhat.
My Lighting class is calling, so I’ll finish this tomorrow. The bottom line for me, though: I think relative strength in oil exploration and production companies will continue.
I’ve just updated my Keeping Score page for September, 3Q17 and year-to-date. IT continues its remarkable run. Utilities et al continue to falter.
Yesterday may have marked an inflection point in the US stock market. Today’s potential follow through, if it happens, will give us a better idea.
Domestically, Mr. Trump appears to be moving on from pressing his social program to tax reform–and, maybe, infrastructure spending, both of which are issues of potentially great positive economic significance. At the same time, results of the first round of the French presidential election (which pollsters got right, for once) seem to suggest the threat that France might leave the euro, thereby reducing the fabric of the EU to tatters, is diminishing.
yesterday’s S&P 500
How did Wall Street react to this news? The sector breakout of yesterday’s returns, according to Google Finance, are as follows:
S&P 500 +1.1%
Consumer discretionary +0.7%
Staples led the pack, presumably because this sector has the greatest exposure to Europe–and a rising euro. Financials advanced significantly also, on the idea that stronger economic growth will lead to rising interest rates, a situation that benefits banks.
Industrials and Materials perked up as well. Again, these are sectors that benefit from accelerating economic growth.
Energy marches to the beat of its own drummer. The rest are consistent with the story behind the winning sectors, either defensives or beneficiaries of moderate (that is, not rip-roaring) economic performance.
My guess is that this pattern may continue for a while yet. Personally, I’m most comfortable participating through Financials and IT.