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Dow Slips Amid High-Wire Trade Tensions

By John Persinos on June 5, 2018

Investors wobbled and lost their footing Tuesday, as they continued to walk a tightrope between upbeat economic trends and worsening trade conflict.

The Dow Jones Industrial Average closed today in the red. The S&P 500 bounced between negative and positive territory to finally inch higher in the final minutes of trading. A FAANG stock rally propelled the tech-heavy Nasdaq into the green. The session was volatile.

The economic recovery remains on track but lurking dangers make caution the watchword. In today’s encouraging but still risky investment climate, place your bets on defensive growth.

To be sure, the housing and construction rebound, declining unemployment, a confident consumer, and a still-bullish stock market paint a bright picture. Instrumental in generating a “wealth effect” among Americans is the steady rise in home prices since their collapse during the Great Recession.

The market could keep rising in coming weeks, but high valuations leave a shrinking margin of safety. You should stick to high-quality stocks that are in growth mode but boast inherent strengths that should hold them in good stead if the market stumbles.

And stumble it will. Just as trade rhetoric appeared to be calming down, it heated up again today.

Mexico announced Tuesday that it will impose tariffs of 15% to 25% on U.S. steel products and on some agricultural goods, as retaliation against President Trump’s tariffs on steel and aluminum.

In another sign of trade disarray, White House economic adviser Larry Kudlow said today that Trump is considering a dramatic shift in negotiations over the North American Free Trade Agreement (NAFTA).

The president now contemplates separate deals with Canada and Mexico, outside of the NAFTA framework. The two countries warned that this scenario is a recipe for enormous disruptions to the global supply chain.

Kudlow isn’t an economist, by the way. He’s a former talking head on CNBC.

I’ve been covering finance for more than 36 years. I’m also cursed with a strong memory. And here’s what I remember about the nation’s top economic policymaker.

In a National Review opinion piece that appeared in December 2007, Larry Kudlow wrote “despite all the doom and gloom from the economic pessimistas, the resilient U.S. economy continues moving ahead.” He predicted that gloomy forecasters would “wind up with egg on their faces.”

Kudlow wrote that “very positive” news in housing should “cushion” falling home sales and prices. “There’s no recession coming… It’s not going to happen,” he wrote.

Kudlow continued to spout these views on CNBC, right up until the Global Financial Crash of 2008. The Great Recession of 2008-2009 ensued.

Mr. Kudlow has brought his forecasting prowess to the White House.

Confederacy of dunces…

Why do I point this out? To remind you of a truism: Beware of official pronouncements, especially those made by former cable television performers. Just because a guy wearing a suit says something with great certitude on TV doesn’t make it true.

Stay contrarian. Don’t assume government officials, whether they’re Democratic or Republican, know what they’re doing. They often don’t. I include administrations of both parties in this equation. Politicians across the spectrum, from left to right, are for the most part economic illiterates.

The news today kept investors on their toes. Also on Tuesday, German officials said it’s possible that Group of Seven (G7) leaders won’t issue the usual communique at the end of talks next week. The joint statement is designed to show unity among the world’s seven most powerful industrial countries.

The June 8-9 meeting in Canada is sure to be contentious, after Trump angered Canada and European Union G7 members by imposing tariffs on steel and aluminum. Trump also has vowed to ban German luxury cars from American roads. Let that idea sink in.

Does the daily farce on trade policy make you nervous? It should. Anyone who thinks trade conflict is just posturing is delusional. History shows that mere “words” can lead to wars — not just trade wars, but shooting wars.

Maybe you’re tired of hearing me say it, but we’re overdue for a crash. Stock markets go through seven-to-eight year cycles. The last market bottom was in 2008.

Investors are enjoying paper profits now, but a crash can set back retirement plans by many years. It can take years to break even from a 20% loss. The larger the investment, the longer it takes to bounce back.

Stay invested, but avoid aggressive risk-taking. Here’s a prudent portfolio allocation now: 35% stocks, 35% hedges, 20% cash, and 10% bonds. About 5%-10% of your hedges portion should be precious metals such as gold and silver. Other hedges include commodities and agriculture-linked investments.

When the downturn hits and nest eggs get clobbered, many investors will be forced to work through retirement. Does the prospect of working in your supposed golden years appeal to you? I didn’t think so. Amid today’s headline risks, proper allocations and careful stock picking are more important than ever.

Tuesday Market Wrap

  • DJIA: -0.06% or -13.78 points to close at 24,799.91
  • S&P 500: +0.07% or +1.93 points to close at 2,748.80
  • Nasdaq: +0.41% or +31.40 points to close at 7,637.86

Tuesday’s Big Gainers 

Building materials maker beats on earnings.

Food producer enjoys surging demand.

Enterprise software firm’s earnings shine.

Tuesday’s Big Decliners 

Marine fuel logistics firm takes $200 million write-off.

Analysts turn bearish on marketing company.

Apparel retailer posts quarterly loss.

Letters to the Editor

“Can you recommend certain sectors as Trump plays?” — Denise J.

Instead of making broad generalizations about defense, infrastructure and deregulation, you must pick your spots.

Trump has boosted defense spending, but not all defense firms have benefited. He has promised huge infrastructure spending, which hasn’t materialized. Don’t just pile into sectors. Scrutinize earnings reports, balance sheets and market position.

Questions about government policy as it affects stocks? Drop me a line: mailbag@investingdaily.com

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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