Stocks Edge Higher as G7 Fears Ebb

The Group of Seven (G7) meeting, which started Friday, reminds me of Thanksgiving dinner at our house. Every year, an errant relative sparks a pointless squabble with the family, just before everyone arrives for dinner.

Leading up to the G7 gathering, President Trump picked a fight with six of America’s closest relatives. As world leaders took their seats at the table, tensions were high.

Stocks opened in the red today on summit jitters, but reversed course in the late afternoon as investors came to the conclusion that G7 discord was merely sound and fury. Attention focused instead on optimistic expectations for corporate earnings in 2018. The Wall Street consensus is for year-over-year earnings growth to reach 22.2% this year.

Nonetheless, gains today were kept in check as investors cast a wary eye on the G7 summit’s dysfunctional proceedings.

For two days starting today, leaders from the G7 — Canada, France, Germany, Italy, Japan, the United Kingdom and the United States — are gathering in Quebec for their annual summit.

Last week, President Trump imposed 25% tariffs on aluminum and 10% tariffs on steel to other countries beyond just the usual boogeyman of China. The new tariffs target Canada, the European Union and Mexico, a move that ignited a firestorm of controversy.

Industrial stocks, in particular, have suffered this year from trade tensions. With roughly 45% of the sector’s sales coming from overseas, trade disputes have been a drag on the group. On a total return basis, the benchmark Industrial Select Sector SPDR (XLI) year-to-date has fallen 1.23%, whereas the SPDR S&P 500 ETF (SPY) has gained 1.94%.

As he pursues his America First policies, Trump has shown little interest in multilateralism. On Friday, he resumed his attacks on Canada and what he called “unfair trade deals” with G7 countries. White House officials also announced that the president would leave the talks four hours earlier than initially planned.

The G7 is made up of the world’s most powerful industrial economies. These developed nations are America’s closest allies. At least, they used to be.

One person is bound to be pleased with G7 acrimony: Russian President Vladimir Putin. The Russian dictator seeks to divide the west and he is succeeding splendidly. Trump raised eyebrows today when he stated that he thinks Russia should be allowed to attend the G7 meeting.

Oy, Canada!

Wall Street dislikes this state of affairs but it’s calculating that the G7’s internal conflict is mostly just bad optics. Wishful thinking, perhaps.

A feud with Stalinist totalitarian states such as North Korea is one thing. But a feud with… Canada?

Canada boasts a highly developed mixed economy, representing the world’s 10th largest gross domestic product in nominal terms. Canada depends on the U.S. for two-thirds of its trade. The White House cited “national security” concerns when it imposed metals tariffs on Canada.

“It is simply ridiculous to view any trade with Canada as a national security threat to the U.S.,” Canadian Prime Minister Justin Trudeau said of the trade sanctions.

In a recent phone call with Trudeau, President Trump invoked the War of 1812 between Britain and America as justification for tariffs against Canada, erroneously arguing that our northern neighbor was responsible for burning down the White House.

Quick history lesson: Canada didn’t become a nation until 1867. It was British troops who burned down the White House.

Let’s be generous and assume that the president was joking about the War of 1812. Let’s also assume that the rancorous statements on trade from the White House are negotiating tactics designed to wring concessions, akin to a poker player bluffing.

Problem is, even if the escalating rhetoric doesn’t lead to a full-blown trade war, the damage already has been done in terms of all the wealth that has been lost in the stock market.

On Wednesday, analysts at JPMorgan Chase (NYSE: JPM) estimated that Trump’s tough talk on trade has destroyed $1.25 trillion in market value since March.

In addition to trade disarray, investors must contend with monetary tightening in the U.S. and Europe.

European Central Bank policymakers are scheduled to meet June 14 to debate whether to end bond purchases later this year. Traders are betting that the ECB will adopt a hawkish stance toward interest rates, just as the global economy is slowing.

The Federal Reserve meets June 12-13, at which time the U.S. central bank is expected to raise interest rates, its second hike this year. Fed officials have been hinting at four rate increases in 2018 rather than the originally planned three.

The markets avoided a rout today and managed to climb from negative to positive territory. Trading today was choppy. Next week is likely to be volatile as well.

The summit between Trump and North Korean President Kim Jong-Un is scheduled for June 12 in Singapore. Eccentric former NBA star Dennis Rodman will be in attendance. Yep, you read that correctly — Dennis Rodman. When markets open Monday, buckle up.

Friday Market Wrap

  • DJIA: +0.30% or +75.12 points to close at 25,316.53
  • S&P 500: +0.31% or +8.66 points to close at 2,779.03
  • Nasdaq: +0.14% or +10.44 points to close at 7,645.51

Friday’s Big Gainers

  • Vitamin Shoppe (NYSE: VSI) +12.80%

Wellness retailer’s new CFO sparks analyst optimism.

  • Camping World Holdings (NYSE: CWH) +7.62%

RV services provider forecasts robust year.

  • Rubicon Project (NYSE: RUBI) +5.76%

Demand picks up for digital advertising firm.

Friday’s Big Decliners

  • Evolus (NSDQ: EOLS) -17.46%

FDA rejects medical aesthetics firm’s new product application.

  • Liberty Tax (NSDQ: TAX) -13.89%

Tax preparer caught in accounting scandal.

  • ArQule (NSDQ: ARQL) -7.79%

Biotech undergoes top management shuffle.

Letters to the Editor

“Does the global trade feud make you leery of emerging markets?” — Rick P.

Emerging markets such as Mexico enjoy inherent strengths that offset trade tensions. Long term, I’m optimistic that these tensions will die down. The question is when. Investors are in for a rough ride of indeterminate length. Stay the course but stay cautious.

Got questions about trade? Drop me a line:

John Persinos is an investment analyst and managing editor at Investing Daily.


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