Stocks Soar, Shrug Off Italian Drama
Are investors still worried about Italy? Hey, fugghedabboutit.
Global equities rebounded Wednesday, as political theater in Italy was superseded by optimism over economic growth and corporate earnings. Leading the recovery were Italian equities. La Dolce Vita (the sweet life) was back, at least for today.
Payrolls processor ADP reported today that the U.S. added 178,000 private-sector jobs in May, continuing the trend of solid monthly jobs growth. Hiring was broadly spread across industries and company size. The U.S. unemployment rate stands at only 3.9%.
In other positive news today, the Federal Reserve released an upbeat “beige book” that pointed to moderately strong economic growth with muted inflationary pressures.
U.S. companies are awash in cash from the Trump tax cuts. That’s good news for shareholders, as more firms initiate stock buyback programs. With first-quarter earnings season largely in the books, research firm FactSet reports that the blended year-over-year earnings growth rate for the S&P 500 was 24.6%.
Today’s rally in oil prices provided another tailwind for stocks. West Texas Intermediate rose 2.43% to close at $68.35 per barrel. Brent North Sea crude jumped 3.19% to close at $77.90/bbl. Supply disruptions are helping drain the global oil glut, pushing crude prices higher.
But geopolitical risk hasn’t simply gone away. Italy has been without a government since elections in March because no political faction has sufficient support to form a majority. Perhaps Italians are running a large experiment in anarchy.
Italy still has time to cobble together a ruling coalition that will keep the country within the EU. This window of opportunity is what cheered investors today.
Britain, which made an impulsive decision via referendum in 2016 to exit the EU, doesn’t get a second chance. “Brexit” talks remain stalled and pose a threat to global economic growth.
Germany, Spain and other EU members also grapple with challenges from anti-establishment parties. So-called populists who deride the EU as a “globalist” tool are delighted with the disarray on the Continent. But any sensible investor with money in the stock market should be unhappy with the messy state of affairs overseas.
Conflicting signs on NAFTA…
Trade conflict remains a cloud over stocks, as the international system of commerce devolves from multilateral treaties to arbitrary protectionism.
U.S. Treasury Secretary Steven Mnuchin declared with great fanfare last week that the trade war with China was “on hold.” Yesterday, Mnuchin’s statement suddenly seemed ridiculous, when the White House declared that it would proceed with its plan to impose 25% tariffs on $50 billion worth of imported Chinese goods within the next month.
It’s not just China. The Trump administration is running out of time to deliver a renegotiated North American Free Trade Agreement (NAFTA). Those privy to the talks, including government negotiators, trade experts, industry lobbyists, and lawmakers, report that little progress has been made on the NAFTA revamp because U.S. demands greatly exceed what Canada and Mexico are willing to accept.
Talks started last August. The three parties are now racing to conclude before the Mexican presidential election on July 1, which could usher an anti-American government into power. If that happens, all bets are off.
The White House’s demands include a requirement that 50% of the value of North American vehicles originate in the U.S., and the automatic renegotiation of NAFTA every five years. Mexico and Canada are beginning to suspect that Washington’s proposals are “poison pills” and Trump’s America First economic team is angling for a pretext to quit the pact.
If NAFTA blows up, stocks will suffer collateral damage. When governments tinker with tariffs, businesses must scurry to adapt because they’re linked into global supply chains.
Whether you’re a Republican or a Democrat, know at least one truism: trade wars are bad for stocks. Period.
American companies have $8 trillion of capital invested abroad. Foreign firms have sunk $7 trillion in America. Finance knows no borders.
Rome’s fall and rise…
After yesterday’s battering, stocks popped higher today on renewed faith that Italy will somehow sidestep collapse. But this good news/bad news investment climate is causing cognitive dissonance on Wall Street.
Investors continue to push the aging bull market forward, as economic growth remains on track. But they’re jittery about rising geopolitical mayhem.
As long as the global economy moves ahead (albeit fitfully), you should focus on high-quality stocks that still have plenty of room to run.
Even in this risky and volatile market, you can find multinational leaders with rock-solid balance sheets, products that everyone needs, reasonable valuations, and superb growth potential.
Passive investing is all the rage. It generates tons of money for fund powerhouses such as BlackRock (NYSE: BLK). But I counsel a mixed approach that combines passive with highly active. Nowadays, careful stock picking is as important as ever.
When the next big sell-off hits, the “robo-traders” will only make it worse. Some worries can’t be shrugged off.
Wednesday Market Wrap
- DJIA: +1.26% or +306.33 points to close at 24,667.78
- S&P 500: +1.27% or +34.15 points to close at 2,724.01
- Nasdaq: +0.89% or +65.86 points to close at 7,462.45
Wednesday’s Big Gainers
- Dick’s Sporting Goods (NYSE: DKS) +25.80%
Retailer beats on earnings, raises guidance.
- Movado Group (NYSE: MOV) +16.71%
Swiss watchmaker’s operating results excel.
- Dorian LPG (NYSE: LPG) +14.89%
LPG shipper target of buyout bid.
Wednesday’s Big Decliners
- Daktronics (NSDQ: DAKT) -18.56%
Electronic display maker’s earnings disappoint.
- Rigel Pharmaceticals (NSDQ: RIGL) -9.78%
Analysts turn bearish on biotech.
- Gogo (NSDQ: GOGO) -7.05%
Aviation communications provider bleeding cash.
Letters to the Editor
“Isn’t solar power in trouble under Trump?” — Brad H.
Solar power is in the midst of a long-term boom that’s nearly unstoppable. Investors who dismiss solar as a fad are missing one of the greatest investment opportunities of the decade. The Trump administration’s pro-fossil fuel policies won’t undermine solar energy’s growing appeal.
Questions about breakthrough investment trends? Give me a shout: 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.