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Markets “Kick the Can” on Risks, Close Higher

When I was a kid back in the Stone Age, we didn’t have smartphones or Xbox consoles. We played primitive games like “kick the can.” Wall Street played that game today.

Worsening global trade war? Divisions within the Western alliance? Chaos over Brexit? Stirring inflation? Rising interest rates? Flattening yield curve? Investors have decided to deal with those worries down the road.

Traders on Tuesday tuned out the negative news and accentuated the list of positives: robust expectations for corporate profits, rising oil prices, and continued economic growth. The main stock indices ended in the green, extending their gains from Friday. For the S&P 500 today, it was its highest close since February.

In my view, investors are displaying dangerous complacency about the hazards of trade conflict. You should remain cautious. But for today at least, the Pollyannas held sway on Wall Street.

A big test on earnings will come from a trio of big banks Friday, when economic barometers JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C) are scheduled to report. All are expected to exceed their earnings performance compared to the same year-ago quarter.

That said, there’s no denying the escalation in trade hostilities between the U.S. and China, after the two countries last Friday imposed tit-for-tat tariffs on $34 billion worth of each other’s goods.

Farmers in America’s heartland are in particular duress, as China cancels soybean and corn orders and devises ways to do without U.S. imports of those crucial crops. China has been mandating and subsidizing higher soybean and corn production from its own farmers and relying on Russia and Brazil as alternative sources.

Ironically, the agricultural “red states” that went for Trump in the 2016 election are getting clobbered the worst from this trade war. But Wall Street is more focused on corporate earnings, which are projected to produce a bumper crop.

Second quarter earnings season starts in earnest this week and the news so far is encouraging, in large part because of the massive business-friendly tax cuts signed by Trump in December 2017.

For the second quarter, with 20 companies so far in the S&P 500 reporting actual results for the quarter, 85% of firms have reported a positive earnings per share surprise and 90% have reported a positive sales surprise, according to the research firm FactSet.

The estimated earnings growth rate in the second quarter for the S&P 500 is 20%. If that number turns out to be the actual growth rate for the quarter, it will mark the second highest earnings growth since Q3 2010, which came in at 34%.

Rising oil prices and continued economic growth also are cheering investors. The trade war has become an annoying backdrop that investors choose to ignore.

It’s hard to ignore the troubling news from Britain. Recent cabinet resignations are likely to cause an unraveling of the ruling party, triggering snap elections that could unseat Tory Prime Minister Theresa May.

The British pound is sinking amid fears that the UK is on a collision course with the European Union. The only person smiling is Russian President Vladimir Putin, who wants nothing better than disarray in the West. The post-World War II Western alliance has fueled America’s rise as an economic superpower. That alliance is in tatters.

Stocks are enjoying an immediate tailwind, though, from rising oil prices. Crude continued its upward trajectory today thanks to production disruptions caused by an oil workers’ strike in Norway.

The price of Brent North Sea crude, on which international oils are priced, rose 0.99% today, to close at $78.84 per barrel. West Texas Intermediate, the U.S. benchmark, rose 0.32% to close at $74.09/bbl.

As the following chart shows, oil prices have been buoyant over the past 12 months (compiled with data from the U.S. Energy Information Administration):

Wall Street has interpreted rising oil prices as a bullish sign of resilient economic growth, although that may soon change as businesses and consumers start to feel the pinch of higher oil prices.

OPEC’s recent decision to open the oil spigots may not be enough to offset additional disruptions in Venezuela, which is mired is debilitating social strife, and Iran which must contend with new sanctions.

Tax cuts combined with rising oil prices could fuel inflationary fires, which in turn could prompt the Federal Reserve to impose interest rate hikes on a more aggressive schedule than originally planned.

Additional wild cards include the ballooning federal budget deficit and an economic cycle that points to a recession around the corner.

But as far as Wall Street is concerned, these threats are something to worry about later. Stocks today were alive and, well, kicking.

Tuesday Market Wrap

  • DJIA: +0.58% or +143.07 points to close at 24,919.66
  • S&P 500: +0.35% or +9.67 points to close at 2,793.84
  • Nasdaq: +0.04% or +3.00 points to close at 7,759.20

Tuesday’s Big Gainers

  • MediciNova (NSDQ: MNOV) +11.84%

Biotech’s sclerosis therapy posts favorable test data.

  • Summit Therapeutics (NSDQ: SMMT) +8.84%

Biotech awarded grant to develop new antibiotics.

  • PepsiCo (NSDQ: PEP) +4.76%

Beverage giant posts strong earnings.

Tuesday’s Big Decliners

  • Spero Therapeutics (NSDQ: SPRO) -20.36%

Analysts negative on biotech’s proposed stock offering.

  • Sparton (NYSE: SPA) -12.15%

Wall Street turns bearish on electromechanical device maker.

  • Origin Agritech (NSDQ: SEED) -6.56%

Demand slows for agri-biotech firm.

Letters to the Editor

“I keep seeing the term ‘asymmetric investing.’ What does it mean?” — Gary C.

“Asymmetric” is the absence of symmetry. As applied to investing, it means the risks versus the rewards are imbalanced. Asymmetric investing is a strategy whereby the outcome of a trade probably has more profit than loss or risk taken.

Questions about asymmetric investing techniques? Drop me a line:

John Persinos is the managing editor of Investing Daily.

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