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Stocks Defy Trade Gloom, Bounce on Growth Optimism

Wall Street on Thursday returned from the holiday in a positive mood and eager to put trade worries aside. Stocks rallied, as investors focused on the growing economy and upbeat projections for corporate earnings.

That said, the Dow Jones Industrial Average started to wobble and lose traction in late afternoon trading, as trade jitters lingered.

Federal Reserve minutes released in the afternoon showed that officials are worried about escalating trade conflict but aren’t inclined to delay planned interest rate hikes this year.

Trading volume was light Thursday, which is to be expected on the day after July 4. The real fireworks start tomorrow.

Washington has said it would implement tariffs on $34 billion of Chinese imports, effective Friday. Beijing has vowed to retaliate with a commensurate level of tariffs on the same day. If China retaliates against U.S. tariffs, Washington is ready to impose additional tariffs on $400 billion in Chinese goods.

China warned on Thursday that the U.S. is “opening fire” on the world with its threatened tariffs.

An EU-China alliance?

Reports surfaced this week that China is lobbying the European Union to issue a strongly worded joint statement against President Trump’s trade policies at a summit scheduled for later this month.

China’s leaders are suggesting to the EU a trade alliance, which would include China opening more of its market to European exports.

China also is proposing that the two economic powers initiate legal actions against the U.S. at the World Trade Organization (WTO), an entity that Trump on Monday attacked as unfair to America.

The stakes are high. The U.S. and China are the world’s two largest economies; the EU is the largest trading bloc.

If the EU agrees to join forces with China, it would represent a seismic shift in the global economic order — a coup for China and a setback for U.S. influence.

A Sino-European summit is slated to take place in Beijing on July 16-17. Chinese President Xi Jinping and top EU officials are expected to be in attendance.

Trump’s tariffs on European steel and aluminum and threats to impose sanctions against the EU’s automobile industry have rankled the EU. The trade conflict already is slowing growth in the “euro zone,” the monetary union of 19 of the 28 EU member states which have adopted the euro as their common currency.

That said, Brussels isn’t quite ready to join a love-fest with Beijing.

European leaders share the White House’s resentment of China’s strong-arm tactics on trade. They agree that China should be held accountable, especially the country’s tendency to purloin strategically sensitive technology. But they’re adamant that protectionism is the wrong way to deal with the problem.

Trump’s trade policies have fractured the West. China refuses to reform its trade policies and it’s unlikely to back down. Instead, the country is seizing the trade war as its big chance on the world stage.

A new report from research firm Oxford Economics, released in late June, argues that Trump’s threatened tariffs against EU automakers would make a big dent in U.S. gross domestic product and destroy thousands of American jobs (see chart).

In a sign of potential job losses to come, German-based BMW (OTC: BAMXF) this week said Trump’s proposed tariffs of 20% would eliminate jobs at its vehicle manufacturing facility in South Carolina.

It’s difficult to separate the important news from the white noise. To be sure, you should stay cautious amid all of this “headline risk.” But if you’re excessively cautions, you’ll leave money on the table. Opportunities for making money still exist. Stay invested but elevate cash levels and focus on value.

In the days ahead, we’re likely to get further confirmation, in terms of earnings and economic data, that the U.S. economy is strong and not a basket case.

For the second quarter, with 19 companies in the S&P 500 reporting actual results for the quarter, 95% of firms have reported a positive earnings surprise and 89% have reported a positive revenue surprise, according to research firm FactSet.

The consensus estimate is that year-over-year earnings growth for the S&P 500 in the second quarter will reach an impressive 20%. Meanwhile, the June jobs report scheduled for release Friday is expected to confirm the strength of the labor market.

There’s no denying that the geopolitical climate is stormy right now. But eventually, the storm will pass and stocks will return to trading on their fundamentals. Stick to your long-term goals.

Thursday Market Wrap

  • DJIA: +0.75% or +181.92 points to close at 24,356.74
  • S&P 500: +0.86% or +23.39 points to close at 2,736.61
  • Nasdaq: +1.12% or +83.75 points to close at 7,586.43

Thursday’s Big Gainers

  • Pain Therapeutics (NSDQ: PTIE) +20.47%

Biotech’s pain killer gets FDA green light.

  • Seadrill (NYSE: SDRL) +12.43%

Offshore energy driller exits Chapter 11.

  • Horizon Global (NYSE: HZN) +8.65%

Analysts turn bullish on cargo management equipment maker.

Thursday’s Big Decliners

  • American Superconductor (NSDQ: AMSC) -15.72%

Chip maker hit by slowing demand.

  • Clean Energy Fuels (NSDQ: CLNE) -15.50%

Analysts downgrade provider of natural gas for vehicle fleets.

  • Ever-Glory International Group (NSDQ: EVK) -11.29%

Apparel retailer’s sales under pressure.

Letters to the Editor

“Are Trump’s pro-fossil fuel policies the death knell for solar power?” — Paul N.

Not by a long shot. Solar power is becoming more widespread, bigger in scale and less expensive to produce. The average price of a solar panel has plunged by 60% since 2011 and technological advances continue to slash costs. A growing number of countries, particularly China, are aggressively pursuing solar power as costs come down. Solar is here to stay.

What are your views of the trade war? Let’s get a dialogue going:

John Persinos is the managing editor at Investing Daily.

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