Double Whammy: Inflation, Tariffs Hit Stocks

Before I get to Friday’s market re-cap, let’s consider a few words of investment wisdom from the Mafia.

When guys get together they love to quote gangster movies and TV shows. Our enduring fascination with the gangster genre stems from the voyeuristic thrill of seeing criminals behave without social constraints.

Sure, they’re homicidal sociopaths, but these thugs enjoy uninhibited expression of their primal urges. We watch horrified — and with envy.

Last night, I was re-watching episodes of The Sopranos when mob boss Tony Soprano said something that struck home:

“It’s good to be in something from the ground floor. I came too late for that, and I know. But lately I’m getting the feeling that I came in at the end. The best is over.”

It occurred to me that a lot of investors feel that way. They think they’ve missed the boat on millionaire-making opportunities. But it’s never too late to find an emerging trend that’s worthy of a ground-floor investment.

Technological change never stops; new breakthroughs (and new millionaires) are continually born. The trick is to pinpoint a nascent “megatrend” and act fast, before the herd catches on.

Below, I examine six investment themes (all of them legal and legit!) that should withstand challenges such as rising inflation and global trade war — twin threats that delivered a one-two punch to financial markets Friday. The Dow Jones Industrial Average, S&P 500, and Nasdaq all closed in the red. The Dow posted its first weekly loss in four weeks.

The Labor Department reported today that nonfarm payrolls soared by 201,000 jobs in August, largely lifted by hiring in construction, transportation, and health care.

Average hourly earnings increased 0.4%, after rising 0.3% in July. That raised the annual increase in wages to 2.9% in August, the largest gain since June 2009, from 2.7% in July.

The robust employment report raised concerns that the Federal Reserve may hike rates more aggressively than planned to quell inflation.

Trade tensions also weighed on markets. China announced Friday it will boost export tax rebates for 397 items ranging from steel to electronic products, with the goal of improving demand for exports amid its trade war with the U.S.

China’s finance ministry said that effective September 15, tax rebate rates for products including lithium batteries, light-emitting diodes (LEDs), and semiconductors will be increased to 16%. The move is designed to offset the negative effect of U.S. tariffs on the volume of Chinese trade.

China assesses a 16% value-added tax (VAT) on some exports; the rebate ensures that exporters would get back the full amount.

All eyes are now on President Trump, who said Friday that the U.S. is ready to launch tariffs on $267 billion worth of imports from China, on top of tariffs on $200 billion in goods the administration is already preparing.

Nada on NAFTA…

U.S. and Canadian negotiators continue to wrangle over a revamp of the North American Free Trade Agreement (NAFTA), with crucial issues still unresolved.

Trump today threatened Canada with economic “ruination,” which didn’t exactly foster goodwill with our northern neighbor.

The stakes are high (see chart, compiled with data from the U.S. Census Bureau):

Six Big Investment Themes

Trade tensions ensure volatility into the foreseeable future, but one of the surest ways to make money is to invest in unstoppable trends largely immune to headline risk. I’ve pinpointed six of them:

1.) Medical information technology. In the booming health care field, cost containment is the name of the game. Federal and state regulators increasingly mandate the use of information technology to digitize and analyze patient records. Software firms in this space enjoy long-term tailwinds.

2.) Industrial robotics/automation. Increasingly integrated with artificial intelligence, robotics/automation is permeating a wide variety of industries. Notably, retail giants such as Amazon (NSDQ: AMZN) and Wal-Mart (NYSE: WMT) are automating their distribution capabilities, as e-commerce grows in emerging markets and supply chains get stretched.

3.) Power providers. The migration from coal to natural gas and renewable energy confers many environmental advantages, but it also represents a watershed in the power generation sector. Long-term plays include natural gas producers, liquefied natural gas (LNG) shippers, and renewable power suppliers.

4.) Technology for 3D-sensing. Makers of chips and other components that support three-dimensional sensors embedded in smartphones face growing demand. These capabilities are crucial to the exploding field of virtual/augmented reality, which is migrating beyond video games and into commercial applications.

5.) Aerospace/defense innovators. Rising geopolitical tensions are fueling greater Pentagon expenditures. However, the mega-caps are overvalued and vulnerable to trade risk. Better bets are smaller defense firms that specialize in “next-generation” electronics that integrate weapons systems within the Internet of Things.

6.) Immunological treatments. Immunotherapy is a hot area, as researchers try to find a way to get the body to fight cancer by itself, eliminating the need for costly and painful techniques such as chemotherapy and radiation. Small biotechs with new immunotherapy drugs in the pipeline are poised for big gains.

Bet on megatrends with sustainable momentum. That way, you won’t have to sweat the market’s temporary ups-and-downs.

Friday Market Wrap

  • DJIA: 25,916.54 -79.33 (0.31%)
  • S&P 500: 2,871.68 -6.37 (0.22%)
  • Nasdaq: 7,902.54 -20.18 (0.25%)

Friday’s Big Gainers

  • Okta (NSDQ: OKTA) +19.47%

Identity solutions provider posts strong earnings.

  • Quanex Building Products (NYSE: NX) +19.27%

Construction materials firm reports robust quarter.

  • Five Below (NSDQ: FIVE) +13.31%

Apparel maker excels on earnings.

Friday’s Big Decliners

  • Korn/Ferry International (NYSE: KFY) -23.45%

Management consultant disappoints on operating results.

  • Argan (NYSE: AGX) -8.48%

Analysts turn bearish on engineering and construction firm.

  • Dago New Energy (NYSE: DQ) -6.72%

Polysilicon maker quits solar wafer manufacturing.

Letters to the Editor

“How does a value-added tax work?” — James R.

A value-added tax (VAT) is a consumption tax on the purchase of a product or service. The VAT is paid by residents of any country in the European Union. When purchasing services or products, both consumers and businesses are liable to pay VAT.

Reader questions or comments are always welcome:

John Persinos is the managing editor of Investing Daily.