I’ve just updated my Keeping Score page for full-year 2018, 4Q18 and the month of December. Uglier than I’d imagined it could be. Where to from here?
I’ve just updated my Keeping Score page for November. …finally an up month!
During the course of trading on Tuesday of last week, the NASDAQ 100 touched the closing (though not the intraday) lows of February, before rebounding sharply. Simultaneously, the S&P 500 did a similar thing, only its stopping point was the higher lows of April.
It looks increasingly likely to me that this action is going to serve as the marker for a selling climax–the point where short-term speculators feel all hope of a rebound is lost and dump out their holdings in a final surge of selling with little regard for price–for the market downturn that began in October.
This positive sign for the market has been reinforced by the statements of influential Fed members that short-term interest rates are presently just below neutral, meaning that that body sees little need to continue to push them upward.
Barring any further damage to the economy from Mr. Trump’s bizarre tariff policies, it looks like we’ll enjoy enough market stability for us to return to the business of picking stocks.
One of Mr. Trump’s first actions as president was to withdraw the US from the Trans-Pacific Partnership, a consortium of world nations seeking, among other things, to halt Chinese theft of intellectual property.
Trump has apparently since discovered that this is a serious issue but has decided that the US will go it alone in addressing it. His approach of choice is to place tariffs on goods imported from China–steel and aluminum to start with–on the idea that the harm done to China by the tax will bring that country to the negotiating table. In what seems to me to be his signature non-sequitur-ish move, Mr. Trump has also placed tariffs on imports of these metals from Canada and from the EU.
This action has prompted the imposition of retaliatory tariffs on imports from the US.
the effect of tariffs
–the industry being “protected’ by tariffs usually raises prices
–if it has inferior products, which is often the case, it also tends to slow its pace of innovation (think: US pickup trucks, some of which still use engine technology from the 1940s)
–some producers will leave the market, meaning fewer choices for consumers; certainly there will be fewer affordable choices
–overall economic growth slows. The relatively small number of people in the protected industry benefit substantially, but the aggregate harm, spread out among the general population, outweighs this–usually by a lot
is there a plan?
If so, Mr. Trump has been unable/unwilling to explain it in a coherent way. In a political sense, it seems to me that his focus is on rewarding participants in sunset industries who form the most solid part of his support–and gaining new potential voters through trade protection of new areas.
Mr. Trump has proposed/threatened to place tariffs on automobile imports into the US. This is a much bigger deal than what he has done to date. How so?
–Yearly new car sales in the US exceed $500 billion in value, for one thing. So tariffs that raise car prices stand to have important and widespread (negative) economic effects.
–For another, automobile manufacturing supply chains are complex: many US-brand vehicles are substantially made outside the US; many foreign-brand vehicles are made mostly domestically.
–In addition, US car makers are all multi-nationals, so they face the risk that any politically-created gains domestically would be offset (or more than offset) by penalties in large growth markets like China. Toyota has already announced that it is putting proposed expansion of its US production, intended for export to China, on hold. It will send cars from Japan instead. [Q: Who is the largest exporter of US-made cars to China? A: BMW –illustrating the potential for unintended effects with automotive tariffs.]
More significant for the long term, the world is in a gradual transition toward electric vehicles. They will likely prove to be especially important in China, the world’s largest car market, which has already prioritized electric vehicles as a way of dealing with its serious air pollution problem.
This is an area where the US is now a world leader. Trade retaliation that would slow domestic development of electric vehicles, or which would prevent export of US-made electric cars to China, could be particularly damaging.
This has already happened once to the US auto industry during the heavily protected 1980s. The enhanced profitability that quotas on imported vehicles created back then induced an atmosphere of complacency. The relative market position of the Big Three deteriorated a lot. During that decade alone, GM lost a quarter of its market share, mostly to foreign brands. Just as bad, the Big Three continued to damage their own brand image by offering a parade of high-cost, low-reliability vehicles. GM has been the poster child for this. It controlled almost half the US car market in 1980; its current market share is about a third of that.
In sum, I think Mr. Trump is playing with fire with his tariff policy. I’m not sure whether he understands just how much long-term damage he may inadvertently do.
stock market implications
One of the quirks of the US stock market is that autos and housing are key industries for the economy but neither has significant representation in the S&P 500–or any other general domestic index, for that matter.
Tariffs applied so far will have little direct negative impact on S&P 500 earnings, although eventually consumer spending will slow a bit. So far, fears about the direction in which Mr. Trump may be taking the country–and the failure of Congress to act as a counterweight–have expressed themselves in two ways. They are:
–currency weakness and
–an emphasis on IT sector in the S&P 500. Within IT, the favorites have been those with the greatest international reach, and those that provide services rather than physical products. My guess is that if auto tariffs are put in place, this trend will intensify. Industrial stocks + specific areas of retaliation will, I think, join the areas to be avoided.
Of course, intended or not (I think “not”), this drag on growth would be coming after a supercharging of domestic growth through an unfunded tax cut. This arguably means that the eventual train wreck being orchestrated by Mr. Trump will be too far down the line to be discounted in stock prices right away.
I’ve just updated my Keeping Score page for a surprisingly strong (to me, anyway) July. Sector rotation is the main message.
Stocks are down today. The ostensible reasons are trade war fears + the administration’s distinctly un-American decision to seize and imprison the children of asylum seekers at the border.
It’s not clear to me that–important as these issues may be for the long-term attractiveness of the US as an investment destination–they are the reasons for the market’s decline. (Personally, I think the mid-term elections will give us the first true read on whether ordinary Americans approve of the UK/Japan-like road Washington has set the country on.)
But I don’t want to write about macroeconomics or about politics. Instead, I want to call attention to the useful purpose that down days, or strings of down days, for that matter, serve for portfolio management.
There are two:
–portfolio realignment. This is as much about psychology as anything else. Typically during a selloff stars go down more than the market and clunkers underperform. Because of this, clunkers that have been hiding in the dark recesses of the portfolio (we all have them) become more visible. At the same time, stars that we’ve thinking we should buy but have looked too expensive are suddenly trading a bit cheaper. The reality is probably that we should have made the switch months ago, but a down day gives us a chance to tell ourselves we’re better off by, say, 5% than if we’d made the switch yesterday.
–looking for anomalies–that is, clunkers that are going down (for me, this is typically a sign that things are worse than I’ve thought, and a sharp spur to action), or stars that are going up. Netflix, for example, is up by about 1.4% as I’m writing this, even though it has been a monster stock this year. I already own enough that I’m not going to do anything. But if I had none (and were comfortable with such a high-flier) I’d be tempted to buy a little bit and hope to fill out the position on decline.
For almost a year I’ve owned domestic shale-related oil stocks, for several reasons:
–the dire condition of the oil market, oversupplied and with inventories overflowing, had pushed prices down to what I thought were unsustainable lows
–other than crude from large parts of the Middle East, shale oil is the cheapest to bring to the surface. The big integrateds, in contrast, continue to face the consequences of their huge mistaken bet on the continuance of $100+ per barrel oil
–there was some chance that despite the sorry history of economic cartels (someone always sells more than his allotted quota) the major oil-producing countries, ex the US, would be able to hold output below the level of demand. This would allow excess inventories to be worked off, creating the possibility of rising price
–the outperformance of the IT sector had raised its S&P 500 weighting to 25%, historically a high point for a single sector. This suggested professional investors would be casting about for other places to invest new money. Oil looked like a plausible alternative.
I’d been thinking that HES and WPX, the names I chose, wouldn’t necessarily be permanent fixtures in my portfolio. But I thought I’d be safe at least until July because valuations are reasonable, news would generally be good and I was guessing that the possibility of a warm winter (bad for sales of home heating oil) would be too far in the future to become a market concern before Labor Day.
Now comes the reimposition of Iranian sanctions by the US.
Here’s the problem I see:
the US imposed unilateral sanctions like this after the Iranian Revolution in 1979. As far as oil production was concerned, they were totally ineffective. Why? Oil companies with access to Iranian crude simply redirected elsewhere supplies they had earmarked for US customers and replaced those barrels with non-Iranian output. Since neither Europe nor Asia had agreed to the embargo, and were indifferent to where the oil came from, the embargo had no effect on the oil price.
I don’t see how the current situation is different. This suggests to me that the seasonal peak for the oil price–and therefore for oil producers–could occur in the next week or so if trading algorithms get carried away, assuming it hasn’t already.