Stocks Fall as Korea, Trade Hopes Collide with Reality
Super-investor Warren Buffett once said: “Risk comes from not knowing what you’re doing.” The financial press loves to quote Buffett, and why not? He’s worth $84.1 billion, so he must know what he’s doing.
Problem is, investors are getting worried that world leaders don’t know what they’re doing. Multiple geopolitical crises unnerved Wall Street today, sending the three main indices deeply into the red. The traditional safe haven of gold shined, with the yellow metal spiking more than 1.00% to top $1,304.00 per ounce.
President Trump today abruptly canceled a planned June 12 summit with North Korean dictator Kim Jong-Un. At the same time, trade tensions took a turn for the worse.
The summit would have marked the first face-to-face encounter between a sitting U.S. president and a North Korean leader. For the past several days, it appeared as if Trump and Kim would reach an accommodation. However, Kim has embarrassed the administration by suddenly ramping up hostilities.
In a letter from Trump to Kim that was released today, Trump wrote:
Sadly, based on the tremendous anger and open hostility displayed in your most recent statement, I feel it is inappropriate, at this time, to have this long-planned meeting.
The letter came in the wake of North Korea’s pointed dismissal of America’s de-nuclearization demands. It didn’t help that Kim’s rogue totalitarian state also called Vice President Mike Pence a “political dummy.” Geopolitics is starting to resemble the third grade, except these overgrown kids have access to nuclear weapons.
Also spooking investors is Trump’s launch of a national security probe into automobile and truck imports.
The U.S. conducts substantial trade in automobile exports and imports, primarily with traditional allies such as Japan, Germany and South Korea. U.S.-based automakers and auto parts makers also manufacture products in Mexico and Canada and then import them into the U.S.
It’s likely that the investigation really isn’t predicated on national security concerns. From my skeptical view, the probe is a gambit related to current re-negotiations of the North American Free Trade Agreement (NAFTA). The unexpected move, initiated via the U.S. Commerce Department, is probably intended to pressure Mexico and Canada into making concessions on NAFTA.
The Trump administration is trying to quickly re-write or scuttle complex trade arrangements that took many years of international diplomacy to put together. It’s understandable that corporate CEOs and Wall Street are nervous. The business and financial communities love the tax cuts that Trump delivered for them, but they fear and loathe protectionism. And rightly so. History clearly shows that no one wins in a trade war.
I’ve consistently warned you in recent weeks about headline risk. We saw the tangible effects of it today. It’s frustrating to see inherently strong investments take it on the chin not because of their fundamentals, but because of great power posturing. Tensions over North Korea and trade will overhang markets into the foreseeable future.
Perhaps most disturbing is the ad hoc nature of these governmental decisions. As politicians change their minds with dizzying frequency, investors are deprived of a road map.
Method to the madness?
The crazy headlines these days remind me of an exchange of dialogue from Francis Ford Coppola’s 1979 Vietnam epic, Apocalypse Now.
Colonel Kurtz: “Are my methods unsound?”
Captain Willard: “I don’t see any method at all, sir.”
Investors face a jungle of crises. Every “breaking news” flash on the television chyron carries the potential seeds of another market flash crash.
Algorithmic trading accelerates downward slides. We saw this dynamic happen in February and March; it’s bound to happen again.
I wouldn’t blame you for being nervous, but I would blame you for taking your chips off the table. Fact is, you’d miss out on the huge profits still to be made, even in this volatile and risky market, if you sat on the sidelines.
The following portfolio allocations make sense now: 35% stocks, 35% hedges, 20% cash, and 10% bonds. Pare back your exposure to those glamor stocks touted by the mindless cheerleaders on CNBC. Strive for “defensive growth.”
When trying to gauge the direction of markets, you should ignore the preening narcissists on cable television. Their views are all over the map and besides, no one holds them accountable for how their advice pans outs.
Focus on companies with solid balance sheets that make products everyone will need far into the future. Major U.S.-based manufacturers are getting hit right now by trade fears, but don’t sell shares of these blue chips based on the worrisome headlines. Trade tensions will inevitably get resolved. However, it’ll take a long time. Hunker down and stick to your long-term investment goals.
Thursday Market Wrap
- DJIA: -0.30% or -75.05 points to close at 24,811.76
- S&P 500: -0.20% or -5.53 points to close at 2,727.76
- Nasdaq: -0.02% or -1.53 points to close at 7,424.43
Thursday’s Big Gainers
- Universal (NYSE: UVV) +29.82%
Tobacco merchant’s operating results excel.
- Cato (NYSE: CATO) +19.57%
Fashion retailer’s profit rises.
- Williams-Sonoma (NYSE: WSM) +5.67%
Consumer retailer’s earnings outperform.
Thursday’s Big Decliners
- Applied Genetic Technologies (NSDQ: AGTC) -15.09%
Biotech awaits FDA decision on new gene therapy.
- Melinta Therapeutics (NSDQ: MLNT) -14.86%
Wall Street negative on biotech’s common stock offering.
- Eiger BioPharmaceuticals (NSDQ: EIGR) -6.09%
Drug maker plans stock offering; analysts give thumbs down.
Letters to the Editor
“You’ve often used the term ‘profit catalyst’ in your daily column. Could you provide a quick definition of the term?” — Joseph N.
As an investor, you should continually scour the business landscape to pinpoint profit catalysts that can propel a stock to market-beating heights. These catalysts can be a corporate acquisition, partnership, product, or regulatory approval…anything new that promises to upend the playing field’s status quo.
Are there any investment topics you’d like me to cover? Send your suggestions, questions and feedback to me at firstname.lastname@example.org.
John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.