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Best of Frenemies: Trade Truce Lifts Stocks

Sometimes, as I cover the continuing trade war and its incessant round of tit-for-tat tariffs, I feel like Bill Murray in the 1993 movie Groundhog Day, where events keep repeating themselves ad nauseam.

The markets in recent months have risen and fallen according to the whims of trade negotiators. An encouraging press release sends stocks up; a belligerent tweet sends them down.

And so the familiar pattern occurred again Thursday, as the markets soared on hints that maybe, just maybe, the on-again, off-again trade war was off again. The S&P 500 rose for its fourth consecutive session.

China announced today that it would accept an invitation by the White House to hold a new round of trade negotiations, raising hopes that the Trump administration would abandon its latest plan to slap additional tariffs on $200 billion worth of Chinese goods.

Export-dependent multinationals have been the most vulnerable to the fickle winds of trade war. Their stocks have served as barometers of progress, or lack thereof, in trade talks.

Industrial stocks were among the biggest gainers today, which isn’t surprising given the stakes involved for the sector (see chart, compiled with data from the Peterson Institute of International Economics):

Also on Thursday, Canadian officials returned to Washington, DC to continue negotiations over a revamped North American Free Trade Agreement (NAFTA).

The U.S. is pushing to reach a new NAFTA deal by October 1, but Canada suggested today that this deadline might be unrealistic.

President Trump has already struck a bilateral deal with Mexico and is threatening to exclude Canada from the trilateral NAFTA pact. A major U.S. sticking point is Canada’s protection of its dairy industry; Trump has threatened to impose tariffs on Canadian-made cars unless Ottawa makes concessions.

But tensions with Canada were outweighed by the Sino-U.S. rapprochement. Good news also arrived on the inflation front.

The Labor Department reported today that its Consumer Price Index (CPI) increased 0.2% in August after a similar gain in July.

Excluding the volatile food and energy components, the so-called core CPI edged up 0.1%. Economists had forecast the CPI rising 0.3% and the core CPI climbing 0.2% in August.

Inflation remains on an upward trajectory, but investors were cheered today by signs that price pressures are moderating. The increase in inflation over the past year has tapered to 2.7% from 2.9% (see chart):

Apple’s (NSDQ: AAPL) renewed vigor also cheered Wall Street. There’s been a lot of media noise in the wake of Apple’s annual product event on Wednesday. Goldman Sachs (NYSE: GS) reduced its earnings forecast for Apple, due to the smartphone maker’s iPhone pricing.

The unveiled XR iPhone model is priced cheaper than Goldman had estimated, prompting the investment bank to lower its fiscal 2019 earnings per share estimate to $13.77 from $14.53.

Nonetheless, investors remain confident that Apple has set the stage for continued growth with its bevy of new gadgets, including bigger screen iPhones and the Apple Watch Series 4. AAPL shares today rose 2.42%, leading a technology sector rebound.

Rise of the small fry…

Large-cap stocks are getting whipsawed by trade war headlines. One way to protect your portfolio is to increase exposure to small-cap stocks.

Year to date, the small-cap Russell 2000 Index has been outperforming the large-cap S&P 500 by a margin of about 2-to-1.

Small caps disproportionately benefit from economic and earnings growth, both of which have been persistently robust this year. Small-business confidence also has been high, due to the Trump administration’s regulatory and tax policies.

Small caps are insulated from concerns about global growth, because they tend to get most of their revenue domestically. Trade conflict and increasing instability in emerging markets have driven investors to smaller stocks, which have less exposure to these overseas risks.

Emerging nations are grappling with multiple crises that already are dampening growth projections for their economies.

For a second consecutive month, OPEC yesterday revised down its global oil demand growth estimate for this year and next, citing a slowdown in emerging markets as a major culprit. U.S. benchmark West Texas Intermediate today fell 2.34% to close at $68.72 per barrel. International benchmark Brent North Sea crude slipped 1.82% to close at $78.29/bbl.

Volatility in the energy patch is likely to continue, as prices fluctuate with supply and demand imbalances, geopolitical tensions, and the rising incidence of severe storms like Hurricane Florence. To quote Bill Murray’s character in Groundhog Day: “Today is tomorrow.”

Thursday Market Wrap

  • DJIA: 26,145.99 +147.07 (0.57%)
  • S&P 500: 2,904.18 +15.26 (0.53%)
  • Nasdaq: 8,013.71 +59.48 (0.75%)

Thursday’s Big Gainers

  • Impinj (NSDQ: PI) +33.17%

RFID solutions provider beats on earnings.

  • Tailored Brands (NYSE: TLRD) +9.86%

Apparel retailer meets earnings estimates.

  • USA Technologies (NSDQ: USAT) +7.39%

Cashless payment systems provider continues to rebound from accounting concerns.

Thursday’s Big Decliners

  • Pivotal Software (NYSE: PVTL) -20.08%

Big data software firm posts weak operating results.

  • Fred’s (NSDQ: FRED) -18.05%

Analysts turn bearish on pharmacy chain.

  • WageWorks (NYSE: WAGE) -16.60%

Employee benefits administrator reaffirms guidance.

Letters to the Editor:

“You often refer to the ‘yield curve.’ Why is it important?” — Tom F.

A yield curve plots the interest rates of bonds with equal credit quality but different maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market and to predict changes in economic growth.

Send your investment questions to: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.

 


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