The following is an excerpt from Zacks Chief Strategist John Blank’s full Jul Market Strategy report To access the full PDF, click here.
What’s the story in July to focus on?
It must be that is the U.S. economy is doing fine. But the global stock markets are reeling from the ramp up of multiple trade wars.
I. An Excerpt from the Global Outlook—
What’s sage advice on global large cap indexes, in terms of looming U.S. trade wars?
First, there’s the view of many -- the China A-share descent into a bear market since early April 2018 is proof -- the U.S. is going to win that part of its global trade war.
For my part, I would not be as sanguine. Retaliation by China and a number of other trade alliances and countries can hurt many U.S. stock groups.
The U.S. has imposed or threatened tariffs on products from countries including China, Canada and Mexico, as well as the European Union. Talk has gone on non-stop for months.
There have been a few signs of less U.S. aggression, but not much. On Wed. June 27th, the Trump administration decided against creating a new regime to review Chinese investment in the U.S. They will instead use an updated version of the existing national security screening process -- to try to block Beijing’s efforts to acquire sensitive U.S. technologies.
That’s about it for the ‘cooler heads will prevail’ crowd.
The U.S. is set to begin imposing tariffs on $34B in imports from China on July 6th. Mr. Trump has also threatened to levy tariffs on up to $500B more in goods from China. Beijing has promised to retaliate in similar fashion.
Canadian retaliatory tariffs of $12.6B took effect on Sunday, July 1st. The Financial Times has reported the European Union has threatened $300 billion in fresh tariffs against American products if Trump follows through on levies targeting European automakers.
Going in a bearish direction, global automakers have warned us. President Trump’s plans to impose a significant tariff on auto imports could raise prices of imported vehicles by as much as $6,000 per car and raise prices of locally made cars, too.
So what do you advise your clients? How seriously do you take this looming U.S. trade aggression into your advice? Do you suggest they stay calm, and not react too much?
My advice is to focus on specific shares and share indexes that are already maintaining their momentum, positive or negative. All of this news is already priced into stocks, at this point in time. If a stock has been going up, it likely will continue, and vice versa.
II. Excerpts on the U.S. Economy, from the San Francisco Fed—
The U.S. economy remains on a solid growth path. Sustained strengthening of employment opportunities and consequent gains in household income have been fueling consistent growth in consumer spending. This in turn is supporting business expansion plans and further employment gains, creating a virtuous cycle of economic growth.
The pace of real GDP growth has been on an upward trajectory in recent quarters. The economy grew 2.8% between the first quarters of 2017 and 2018, well above the 2.2% average pace of growth since the expansion began in mid-2009. We expect this pace to continue in 2018.
The key tailwind propelling growth is federal fiscal stimulus. With the waning effects of this stimulus over the next few years and the expected tightening of financial conditions, we project that growth will slow to our estimated sustainable pace of just under 2% by 2020.
If the current expansion continues past June 2019, it will be the longest in business cycle records dating back to the mid-1800s. The risks of stiffening headwinds remain, notably from rising tensions over international trade, but they are unlikely to be severe enough to push the expansion off course.
III. Zacks Sector/Industry/Company Telescope for July
It’s July. Covering analysts have moved on to looking at the 2nd half of 2018 now.
At the start of 2018, the price trend of the stock market was more positive than now. We are listless with Trade War concerns.
As for estimate revisions, grouped together, we enter the 2nd half of 2018 with the “Bull Market Sectors” (Tech, Industrials, Energy, and Consumer Discretionary) at the top of Zacks sectors. “Bear Market Sectors” (Utilities, Telcos, and Consumer Staples) are at the bottom.
In addition, small and mid cap stocks have outperformed large cap stocks so far in 2018. This is Bullish and Cyclical too.
Short-term interest rates moved higher with Fed tightening, while long-term rates are flat, due to European “QE”. This has reduced the short versus long risk-free spreads. In turn, this has kept Financials at a Market Weight, as banks borrow short and lend long.
(1) Industrials are Very Attractive again. Metal Fabricating is Hot, and Aerospace & Defense, Conglomerates, and Pollution Control all look good.
Top Zacks Stock: Mitsui and Co.
The Mitsui Group is a global empire comprising more than 860 subsidiaries and associated companies with operations in chemicals, foodstuffs, general merchandise, iron and steel, machinery, nonferrous metals, textiles, energy, and real estate and service industries.
(2) Energy is now a Very Attractive sector, with the rise in oil prices. Energy-Alternates, Oil & Gas Integrated, and Oil Exploration and Production are the spots to study.
Top Zacks Stock: Marathon Oil Corp (MRO - Free Report)
Marathon Oil Corporation is a leading exploration and production company with extensive operations across four core regions - Africa, Middle East, Europe and North America.
(3) Consumer Discretionary rises back to Market Weight. The best industry niches are Non-Food Retail/Wholesale, and Autos/Tires/Trucks.
Top Zacks Stock: America’s Car Mart (CRMT - Free Report)
America's Car-Mart operates automotive dealerships and is one of the largest automotive retailers in the United States focused exclusively on the Buy Here/Pay Here segment of the used car market.
The company operates its dealerships primarily in small cities and rural locations throughout the South-Central United States, selling quality used vehicles and providing financing for substantially all of its customers.
(4) Info Tech is back to an Attractive sector. The Semis are hot, once again.
(5) Materials are back to an Attractive sector. The leader is Paper, followed by Steel and Metals non-Ferrous, and Chemicals.
(6) Health Care is still Attractive. The best niche is Medical Care.
(7) Financials are Market Weight. The top niches are Investment Banking & Brokering and Insurance.
(8) Utilities remain Unattractive.
(9) Consumer Staples stay Very Unattractive. The best is Agri-business and Food/Drug Retail. But they are just Market Weight niches.
(10) Telcos remain Very Unattractive.