Stocks Stumble as U.S. Attacks China on Trade

The markets started Wednesday with a bang. Blue-chip stalwarts delivered strong earnings. Stocks in the morning rose to new records.

Then government officials opened their mouths. They threatened new tariffs. Wall Street’s mood soured. Stocks retreated. The trading session grew choppy.

By the closing bell, the main indices were mixed. The Dow Jones Industrial Average eked out a modest gain. The S&P 500 and Nasdaq both closed in the red.

Trump administration officials attending the World Economic Forum in Davos, Switzerland today made provocative statements about trade. They portrayed China as a villain. Commerce Secretary Wilbur Ross called China’s 2025 technology strategy a “direct threat.” He hinted at the imposition of new tariffs against the Middle Kingdom.

Trump left today to attend Davos. It’s unusual for a U.S. president to appear at the forum. Trump wants to deliver his “America First” message in person. The White House is taking a sledgehammer to the post-World War II international order that Davos represents.

In his first year in office, Trump abandoned the Trans-Pacific Partnership trade agreement with Asian nations. This week, he threatened to pull out of the North American Free Trade Agreement (NAFTA) with Canada and Mexico.

Protectionism doesn’t sit well with Wall Street. The U.S. dollar fell to three-year lows today.

Tensions over trade have been brewing. Trump on Tuesday slapped steep tariffs on imported solar panels and washing machines. He said other industries would be next.

But over the long haul, strong earnings should propel stocks. The consensus is that S&P 500 earnings growth in the fourth-quarter will reach 12.4%. Industrial stocks stand out.

Fawning over FAANG…

The media devote a lot of attention to FAANG stocks. The yakkers on cable TV tout the same old Wall Street darlings. These “analysts” are really just a cheap form of entertainment for television’s 24/7 programming needs. If you want to lose money, follow their advice.

Often lost in the noise are market-beating manufacturers. They include Boeing (NYSE: BA), Lockheed Martin (NYSE: LMT), United Technologies (NYSE: UTX), General Dynamics (NYSE: GD), Caterpillar (NYSE: CAT), and W.W. Grainger (NYSE: GWW).

These are the firms that helped form the industrial base of America. Wall Street views their prospects as robust.

BA and LMT report earnings next week. Expectations are high for both. UTX, GD, and GWW reported today; all three beat expectations.

Caterpillar (NYSE: CAT) reports earnings before the bell on Thursday. The world’s largest maker of construction and mining machinery is expected to show strong results. Rising energy and commodity prices are tailwinds for industrial stocks such as CAT.

Founded in 1927, W.W. Grainger is another industrial bellwether. The firm supplies maintenance, repair and overhaul equipment for several industries. GWW’s fourth-quarter earnings beat projections.

The “hollowing out” of America is a media narrative. Sure, the world has shifted to an information economy. There are winners and losers. But there’s been a quiet revolution. Maybe you missed it. Domestic industrials are ascendant.

These firms are streamlining operations. They’re modernizing factories. They’re spawning innovation. There’s more to making money than buying shares of tech stars. An economy isn’t sustained on social media. National greatness doesn’t rest on steaming video. A world power needs companies that actually make things.

The wage differential with overseas competitors once hurt U.S. manufacturers. No longer. Rising middle classes in emerging markets are demanding higher pay. China’s workers aren’t so cheap anymore.

U.S. industrials are reborn. They remain valuable brands. Consider United Technologies. UTX is dismissed as stodgy. It makes everything from aircraft engines to elevators. But UTX has been shedding non-performing assets.

On Wednesday, UTX issued fourth-quarter earnings that beat expectations. The firm provided robust 2018 guidance. General Dynamics also beat on earnings and impressed on guidance.

The improving fortunes of United Technologies, Boeing, and General Dynamics reflect the boom in aerospace/defense. The Trump administration is throwing more money at the Pentagon. It’s not a one-time increase. Bigger defense budgets stretch far into the future. The chart tells the story:

Last week, the Pentagon released its 2018 National Defense Strategy. The new policy focuses on great power competition. Terrorism will be a lower priority.

The military will emphasize China, Russia and North Korea. Welcome to Cold War II.

Pentagon expenditures will be huge for big-ticket items made by Lockheed Martin, General Dynamics and Boeing.

In a generally down day, bank stocks rose. JPMorgan (NYSE: JPM) and Wells Fargo (NYSE: WFC) were big gainers. The financial sector is a winner in tax overhaul. Banks take few deductions; the lower top rate is a windfall for them.

In the meantime, fears of a tit-for-tat trade war pushed stocks lower. Which is ironic, because U.S manufacturing is in sound shape. Tariffs would only hurt them. Such is the logic of politicians.

Wednesday Market Wrap

  • DJIA: +0.16% or +41.31 points to close at 26,252.12
  • S&P 500: -0.06% or -1.59 points to close at 2,837.54
  • Nasdaq: -0.61% or -45.23 points to close at 7,415.06

Wednesday’s Big Gainers

  • W.W. Grainger (NYSE: GWW) +18.53%

Industrial supply firm beats on earnings.

  • McDermott (NYSE: MDR) +14.35%

Analysts cheered by engineering firm’s merger with CBI.

  • Chicago Bridge & Iron (NYSE: CBI) +14.14%

Energy infrastructure firm also gains from MDR deal.

Wednesday’s Big Decliners

  • Teekay (NYSE: TK) -13.50%

Energy transportation firm labors under debt.

  • Valeant Pharmaceuticals (NYSE: VRX) -10.85%

Analysts bearish on drug firm.

  • Tronox (NYSE: TROX) -9.02%

SEC challenges chemical firm’s proposed merger.

Letters to the Editor

“Is now a good time to invest in Brazil?” — Charles S.

Brazil, Russia, India and Russia, aka the BRICs, all contend with economic challenges. Brazil is by far the worst of the lot. The South American country is plagued by economic decline. Political scandals grow worse. Strife besets its cities. Brazil is home to some of the most dangerous stocks on the market.

On Wednesday, an appeals court in Brazil upheld a corruption conviction imposed last July on ex-President Luiz Inacio Lula da Silva. For good measure, the judges increased his jail sentence from nine-and-a-half years to 12 years and one month in jail.

Brazil is mired in its worst economic downturn since the 1930s. The recession deprives Brazilian businesses of workers with disposable income, or worse, jobs. As the number of non-performing loans rise, banks are reducing lending. These trends feed the downward spiral. Brazil is a risky bet right now.

Do you have questions about international investing? Shoot me an email:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

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