It was an intriguing week for the market that saw the China trade war shift to another level, which includes the kind of saber-rattling that suggests the fight could go beyond trade. The financial media has joined mainstream media and is focusing on a worst-case outcome. In the process, they have become de-facto agents of China’s government.

Interestingly, all the assumptions about the future and the pain Americans will endure still dominate trade war stories. Despite the fact all these stories are retreads from a year ago when similar warnings pressured the stock market and emboldened China; and yet, the worst-case scenario hasn’t materialized.

On the contrary, the American economy is in a better place than it’s been in more than a decade with strong growth, rising wages, and growing confidence. In many ways, it’s remarkable. It’s not because tariffs in place have barely dented our $21,000,000,000,000 economy. It’s remarkable because many in the press and the powerful have used their soapboxes calling for an economic collapse.  

Last week saw three defensive sectors higher on the week, while all the others stumbled, especially Industrials (XLI), which had been a bright spot early in 2019.

S&P 500 Index		-0.76%
Communication Services (XLC)		-0.22%
Consumer Discretionary (XLY)		-1.18%
Consumer Staples (XLP)	+0.77%
Energy (XLE)		-0.47%
Financials (XLF)		-2.18%
Health Care (XLV)		-0.53%
Industrials (XLI)		-1.90%
Materials (XLB)		-0.89%
Real Estate (XLRE)	+1.47%
Technology (XLK)		-1.05%
Utilities (XLU)	+1.41%

 

Discovery Process

Trade War Impact

In many ways, the market only being off fractionally is a strong sign. Again, considering the hysteria, there could have been a lot more selling. In fact, the week was bookended with emotionally driven sessions, reflecting uncertainty over the next phase of the trade battle, while interior sessions saw the stock market rally from great corporate and economic data.

This week, investors will get to hear a bunch of worst-case scenarios as a litany of retailers will be reporting financial results. Keep in mind that this is a discovery period for market resolve and measure risk. This will also be a great time for lackluster management to make excuses.

Case in point: John Deere & Co. (DE) posted a big miss last week and spoke about the impact of tariffs. However, it was the sixth consecutive quarterly miss. The company’s execution issues trace back long before America decided to fight back, and China declared war on American farmers.

To be sure, some of the conference calls will give it to us straight. There is no doubt many of these retailers must find ways to absorb higher costs. Walmart (WMT) said it would raise prices -- by how much?  Shoppers don’t and won’t overpay for most of the items the company sells. 

• (HD) Home Depot
• (JCP) J.C. Penney
• (KSS) Kohls
• (URBN) Urban Outfitters
• (AZO) AutoZone
• (VFC) VF Corp
• (LB) L Brands
• (LOW) Lowe’s
• (TGT) Target
• (BBY) Best Buy

Earnings Season & Reaction

Even though this has been a strong earnings period, the reaction underscores a few things about the mindset of investors. Many were prepared to sell the news, in part because stocks had done so well in the first four months. Earnings misses continue to be greeted with massive hits to the share price, but wins aren’t eliciting the kind of positive responses seen in recent years:

• 90% reported
• 76% beat on earning
• 5.4% aggregated growth (historical average 4.8%)
• 0.7% two-day move after beating (1.0% 5-year average)
• -3.5% two-day move after missing (-2.5% 5-year average)

The good news from all of this is we get to identify unfulfilled value while the trade saga plays out. 

Portfolio Approach

Last week, we issued alerts to take profits on two positions (Materials (XLB) and Industrials (XLI)) while adding two more positions (Technology (XLK) and one non-bank financial).

Communication Services	Consumer Discretionary	Consumer Staples
1	3	1
Energy	Financials	Healthcare
1	2	1
Industrial	Materials	Real Estate
2	3	0
Technology	Utilities	Cash
3	0	3

Today’s Session

Google (GOOGL/G)OG) and a string of chipmakers are officially severing ties with Huawei and this is putting significant pressure on the industry and wider technology sector.

Last week’s market resolve has established key downside tests. 

 

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