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Stocks Rise as Trade War Drums Fade

By John Persinos on May 14, 2018

As a student of military history, I can tell you one thing with certainty: Amid humankind’s endeavors throughout the millennia, the most persistent sound has been the beating of war drums.

The drums of trade war have been especially loud this year, but they grew quiet at least temporarily Monday, as U.S. and Chinese officials softened their tone on tariffs.

Conciliatory statements from both sides today fueled hopes on Wall Street that the brewing trade war is really just a shoving match. The main stock indices closed higher.

Investors seem to think that the rat-a-tat-tat on trade is mostly posturing. Hence today’s market rally, with the Dow Jones Industrial Average posting its eighth consecutive winning session.

But despite today’s optimism, investors still face an international climate of fear and loathing. A war of words can easily escalate into a real trade war, or even a shooting war. Global carnage usually starts with verbal insults.

Corporate managers are having trouble planning for the future, as companies scramble for exemptions from President Trump’s proposed tariffs. The U.S. Commerce Department has been inundated with more than 8,200 exemption requests. This disarray makes rational investing all the harder.

But trade tensions eased Monday, in the on-again, off-again trade war between the U.S. and China. The Middle Kingdom indicated today that it would cooperate with America for a mutually beneficial outcome in trade negotiations this week.

China’s Foreign Ministry spokesman Lu Kang made the accommodating comments at a regular briefing. Vice Premier Liu He will attend the talks in Washington, which begin tomorrow and extend until May 19.

President Donald Trump on Monday also back-peddled his stance on ZTE (OTC: ZTCOF), vowing to help the Chinese technology company “get back into business, fast.”

The U.S. last month banned American firms from selling parts and software to China’s ZTE for seven years, a potentially devastating blow for the telecom equipment maker and its content providers. U.S. officials charge that ZTE had illegally shipped telecom equipment to Iran and North Korea.

Investors seem desperate for any indication that a full-blown trade war won’t occur. Meanwhile, talks to revamp the North American Free Trade Agreement (NAFTA) are continuing this week, with the U.S. making tough demands.

The U.S. wants 40% of the value of light-duty passenger vehicles and 45% of a truck’s content to be built at hourly wages of $16 to qualify for tariff-free import from Mexico. The goal is to preserve higher-wage jobs in the U.S. and Canada.

If these stricter U.S. and North American content and wage rules are implemented, automakers that don’t adhere to them could face 2.5% tariffs on cars or sport utility vehicles shipped from Mexico to the U.S. The global supply chain hangs in the balance.

Imploding Sun…

It seems to me that the Trump administration’s protectionist mindset on global trade is a throwback to the 1980s, when Japan was viewed as the major threat to America’s primacy in manufacturing and trade.

When you hear certain “populists” bleat about how America is in decline and foreign competitors are taking advantage of our weakness, think back to the days when pundits warned that the U.S. population was on the verge of becoming indentured servants to the supposedly smarter and tougher Japanese.

This school of thought was epitomized by Michael Crichton’s cautionary novel about an ascendant Japan, called Rising Sun (1992), which became a huge bestseller and blockbuster movie starring the great Sean Connery.

I read the book and saw the movie. I now laugh at how the otherwise brilliant Mr. Crichton got it so completely wrong. The title “Imploding Sun” would have been more appropriate. To be sure, Japan is now getting off its feet, but only after a lost generation of severe economic decline.

Instead of reacting to the daily headlines about trade, keep the example of Japan in mind. China’s world domination is far from a foregone conclusion. Focus on the underlying fundamentals, not the drumbeat of political rhetoric.

Monday Market Wrap

  • DJIA: +0.27% or +68.24 points to close at 24,899.41
  • S&P 500: +0.09% or +2.41 points to close at 2,730.13
  • Nasdaq: +0.11% or +8.43 points to close at 7,411.32

Monday’s Big Gainers

Medical device maker enjoys booming demand.

Biotech’s operating results mixed but still impress.

Telecom equipment provider would benefit from easing of ZTE sanctions.

Monday’s Big Decliners

Biotech’s earnings disappoint.

Analysts turn bearish on prospects of Internet of Things solution provider.

Wall Street skeptical of medical communications provider’s $125 million private offering.

Letters to the Editor

A reader sent me the following question, regarding my May 3 issue of Mind Over Markets, in which I discuss how the S&P 500’s recent dip below its 200-day moving average could signal more pain ahead:

“Is there another indicator that may offer a clue to the market’s breaking point? The 10-month simple moving average (SMA) might be such an indicator. The strategy is long when the S&P 500 is above its 10-month SMA and out of the market when the S&P 500 is below its 10-month SMA. This timing technique ensures that investors are out of the market during extended downtrends and in the market during extended uptrends.” – Andy

Andy, you raise a good point. Recalibrating a portfolio once a month according to the SMA is a momentum strategy that has outperformed buy-and-hold about 70% of the time over the past 80 years.

Here’s how it works: When the S&P 500 edges above its 10-month SMA, buy the sectors with the biggest gains over a three-month timeframe. When the S&P 500 moves below its 10-month SMA, sell the sectors with the biggest losses on a monthly closing basis. This method limits returns, but it reduces volatility and drawdowns.

Questions about buy-and-sell signals? Reach me at:

John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.

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