Stocks Jump Late as China Tariffs Spark Wild Volatility

Wednesday marked yet another vertiginous ride on Wall Street. Stocks at first went into a free fall, but late in the session erased losses to close higher. The culprit for the choppy trading was worsening U.S.-China trade relations.

Today’s extremely volatile market action reminded me of my days as a young father.

My daughter Jennifer is now married with kids of her own. But when she was a pre-teen, she regularly dragged me onto a vintage roller coaster at the local amusement park. Built in 1930, this “thrill ride” was a rickety wooden contraption called The Yankee Cannonball. Jen loved it, but I found it nerve-wracking.

I thought of the Yankee Cannonball today, as I watched the main stock indices embark on dizzying twists and turns. High volatility is paradise for options traders, but unnerving for almost everyone else.

China on Wednesday retaliated against U.S tariffs, faster and harder than Wall Street expected. The main indices at first plummeted, then gyrated. At its session low, the Dow Jones Industrial Average was down by 510 points. By the closing bell, stocks were higher as investors shook off their trade war fears to focus on positive earnings expectations.

The Trump administration plans to impose tariffs on $50 billion in Chinese goods. The world’s second-largest economy hit back today with a list of new duties on a wide variety of U.S. products, including airplanes, cars, soybeans, cotton, beef, chemicals, tobacco, and whiskey. China’s tariffs amount to up to $50 billion worth of U.S. goods.

Gold rose today, while the U.S. dollar fell. The benchmark SPDR Gold Shares ETF (GLD) rose 0.10%. The ICE U.S. Dollar Index (DXY), which measures the greenback against six rival currencies, declined 0.05%.

High stakes for Boeing…

One of the biggest potential losers in the worsening trade battle is Chicago-based aircraft maker Boeing (NYSE: BA). Shares of BA fell 1.04% today.

Boeing is the single largest exporter to China. The country recently gave Boeing a $38 billion airplane order; China threatens to cancel that order and shift to rival plane maker Airbus (OTC: EADSY), which is based in Europe. Boeing commands the biggest market share in China and was expecting China to buy more than 7,000 Boeing jets worth $1.1 trillion into 2036.

The White House’s tariffs target many lesser-known industrial goods. China’s list, however, hits major brand name exports from U.S. blue chip companies. China also took direct aim at products made in GOP-governed “red states” that went for Trump in the 2016 election. China is striving to cause maximum political damage to Trump and his party.

Sanctions on U.S. soybeans would exert particular pain on American farmers in the Midwest. Produced in the heart of “Trumpland,” soybeans are the largest agricultural export from the U.S. to China, totaling $14.2 billion worth of annual shipments.

On Wednesday, the Farm Bureau pleaded publicly with Trump to put aside his protectionist policies. The bureau is America’s largest and most influential farm organization.

Beijing’s list of 25% additional tariffs on U.S. goods covers 106 items with a trade value matching the $50 billion targeted on Washington’s list. Tit-for-tat, indeed.

The effective date of China’s proposed tariffs? It all depends on when U.S. tariffs take effect. Neither side has implemented detailed timetables.

The White House claims that China is a bad actor on world trade, citing the country’s protectionism and intellectual property theft. There is merit to the administration’s complaints.

China maintains a top-down, mercantilist economy that plays hard ball with trading partners. The country’s “Made in China 2025” plan sets out to use subsidies and protectionist policies to dominate several key industries, including aviation, technology and energy.

The question is, how should the U.S. deal with China? You’d be hard-pressed to find a credible economist who thinks tariffs are a good idea. In economic and business circles, the preferred (and proven) method of resolving trade disputes is through negotiation and dialogue within a rules-based international system.

However, Trump has surrounded himself with economic advisors who are aggressively protectionist, a fact that gives investors the jitters.

The upshot: Stay defensive. Avoid the stocks of companies that are particularly vulnerable to a global trade war. As a general rule of thumb, keep a cash level of at least 20% in your portfolio.

Stocks managed to avert a rout today. Investors accentuated the positive by focusing on the next round of corporate operating results. But as the sign on the Yankee Cannonball reads: Fasten your seat belts.

Wednesday Market Wrap

  • DJIA: +230.94 points or +0.96% to close at 24,264.30
  • S&P 500: +30.24 points or +1.16% to close at 2,644.69
  • Nasdaq: +100.83 points or +1.45% to close at 7,042.11

Wednesday’s Big Gainers

  • Lennar (NYSE: LEN) +10.21%

Homebuilder posts strong earnings.

  •  Proteostasis Therapeutics (NSDQ: PTI) +6.52%

Biotech gets FDA fast track for development of new treatment.

  • Boston Beer (NYSE: SAM) +5.26%

Beer maker launches major retail expansion.

Wednesday’s Big Decliners

  • Cloudera (NYSE: CLDR) -40.23%

Cybersecurity firm issues weak guidance.

  • Babcock & Wilcox (NYSE: BW) -8.78%

Engineering company’s top executives target of SEC investigation.

  • Acuity Brands (NYSE: AYI) -3.93%

Building management firm subject of class action lawsuit.

Letters to the Editor

“Which U.S. companies would be the biggest losers in a trade war?” — Robert D.

No one wins in a trade war. But some companies would get clobbered worse than others.

The most vulnerable firms include producers of agricultural goods and machinery, such as Monsanto (NYSE: MON), Deere & Company (NYSE: DE) and Caterpillar (NYSE: CAT); industrial exporters such as Boeing and General Electric (NYSE: GE); car makers such as General Motors (NYSE: GM), Ford (NYSE: F) and Tesla (NSDQ: TSLA); and makers of popular distilled drinks such as Brown-Forman (NYSE: BF-B).

Questions about the accelerating trade conflict? Drop me a line:

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


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