The Week Ahead: Sense vs. Nonsense

We face another tumultuous week on Wall Street, with a slew of key economic reports on the docket and an escalating trade war. As the mass media bombard us with chatter, it’s my job to separate sense from nonsense.

This morning, I heard a “pundit” on financial television declare with great certitude that the U.S. and China would soon resolve the trade war, thereby removing a major source of worry for investors.

Well, that’s what the know-it-alls on TV have been saying ever since the trade war started in January 2018. And all this time, they’ve been wrong, wrong, wrong.

Whenever you see a White House shill on CNBC or Fox Business trying to soothe investor anxieties about government policy, hit the mute button. Skepticism is warranted, whether the talking head is Republican or Democratic, liberal or conservative.

Here’s the real story: There’s no end in sight for this trade war. Tariffs aren’t solving the trade dilemma, but they’re definitely hurting economic growth and corporate earnings.

Goldman Sachs (NYSE: GS) said yesterday that the U.S.-China trade war is increasing the risk of a recession. Accordingly, the investment bank’s economists warn that stock market risks and volatility are likely to grow worse.

It should dismay you to learn that the United States is now the second most protectionist country in the world. In tariff-fueled 2019, the U.S. application of tariffs has gone from under 2% on all products imported into the country to 7.5% (see chart).

Exacerbating trade tensions is the outbreak of a currency war. The People’s Bank of China (PBOC) today again kept the midpoint trading rate of the yuan slightly above 7.00 per $1.00, the third consecutive session where the PBOC set the yuan at a level weaker than the psychologically important seven-per-dollar threshold.

A weaker Chinese yuan makes goods from the country cheaper, which worsens the U.S. trade deficit. President Trump has consistently demanded a weaker dollar to make the U.S. more competitive with other countries. He claims China has devalued its national currency against the greenback to gain an unfair trade advantage.

These tit-for-tat trade and currency battles will continue to spawn market uncertainty and sell-offs in the second half of 2019. That said, you’ll leave money on the table if you get too conservative. The outlook for the rest of the year is a mixed bag of positives and negatives, with enough good news to keep you in the game.

Read This Story: Your Next Moves in This Mixed-Bag Market

The bull market has stayed alive due to resilient economic expansion, historically low unemployment, and still-low interest rates. Corporate earnings growth is slowing but it hasn’t crashed.

The trade war persists, but it shouldn’t prevent you from finding growth opportunities. Stick to value and stay cautious.

Exports amount to roughly 12% of U.S. gross domestic product (GDP) and many U.S.-based global exporters are reporting that the trade war is squeezing second-quarter profits. However, consumer spending represents nearly 70% of GDP and all signs point to a confident consumer who’s still willing to open his wallet.

Keep your eye on the hard data. The calendar of economic reports scheduled for this week is a crowded one. These reports have the power to significantly move stocks up or down, depending on how the numbers line up with expectations (see chart).

You should pay particularly close attention to the Consumer Price Index (Tuesday), Retail Sales (Thursday), and Housing Starts and Consumer Sentiment (Friday).

Recession signal flashes red…

What about the much-feared inverted yield curve? Last week, 10-year interest rates fell below 1.7% in the U.S. for the first time in three years, fueling fears that an inverted yield curve is signaling an imminent recession.

The inverted yield curve occurs when long-term rates are lower than short-term rates, suggesting a growing consensus that economic conditions are about to dramatically worsen.

The inverted yield curve is an arrow in the bear quiver and analysts are increasingly dire in their predictions for the second half of 2019.

After the July 31 rate cut, Fed Chair Jerome Powell intimated that the Fed wouldn’t cut any further this year. However, as economic storm clouds gather, the U.S. central bank this year has leaned toward a dovish stance on monetary policy, not a hawkish one.

Although the stock market lately has subjected investors to wild ups and downs, it’s still registering decent gains. The S&P 500 last Friday closed with a 0.5% loss for the week, but year-to-date the index is up 16.4%.

During this late stage of the economic recovery, you should rotate into non-cyclical, more stable companies that provide services that are consistently used regardless of market or economic conditions. Real estate and utility stocks are great examples.

Also diversify among asset categories. Spread your portfolio among value, large-cap, mid-cap, small-cap, growth and income stocks.

One often neglected move is to invest in mid-caps, which provide greater growth potential than large caps but less risk than small caps. A mid-cap is generally defined as a company with a market capitalization between $2 billion and $10 billion.

There’s still money to be made in this market. The bull market has made fools of the perennial bears.

However, certain risks can’t be ignored, regardless of the nonsense peddled by mainstream media blowhards. These overpaid performers care about ratings, not your financial well-being. They also disseminate a manufactured “consensus” that benefits the interests of the Wall Street/Washington power structure, not average individual investors.

That’s where my Mind Over Markets column comes in. By questioning the conventional wisdom, I help you make the right investment choices.

Letters to the Editor

“John, I would like to clarify a point you’ve made at least a couple of times regarding the trade war. You say that companies pay tariffs, not countries, and that the U.S. government does not profit by them. However, aren’t the tariffs on Chinese goods collected by Customs and put into the U.S. Treasury? I really enjoy all of your articles, by the way!” — Ralph S.

Thanks for the kind words and your loyal readership.

To clarify, companies, not countries, pay tariffs. Tariffs are paid by companies (or their intermediaries) to the customs authority of the country imposing the tariff. Tariffs on imports coming into the United States, for example, are collected by Customs and Border Protection, acting on behalf of the Commerce Department.

Companies typically pass along these costs to consumers. As such, tariffs constitute a tax on businesses and consumers.

As for tariffs increasing government revenue, don’t always count on it. The trade war is compelling many U.S. customers to switch to alternate sources for certain products that don’t carry tariffs, which results in no tariff revenue for Uncle Sam (but which also disrupts existing supply chains).

Questions or comments? I’d love to hear from you:

John Persinos is the managing editor of Investing Daily.