The following is an excerpt from Zacks Chief Strategist John Blank’s full Feb Market Strategy report To access the full PDF, click here
Trade war tariff damage.
Caution tied to policy uncertainty.
Those are the biggest factors holding back stock prices globally. On the U.S. China trade war, here are my three scenarios and their probabilities:
(1) A U.S.-China trade deal on March 1st: I give this a 25% probability. There are too many issues (that are intractable) to see this as a high probability. The U.S. must take a face saving ‘win’ to have this outcome happen.
(2) A U.S.-China trade deal later this summer: I give this a 50% probability. I don’t think the administration is going to get much in the way of added concessions by pressuring China more. But it will continue with this strategy for another quarter or two.
(3) The U.S. escalates -- from 10% to 25% tariffs -- on China March 1st: A 25% probability. I don’t see this as likely. I think there will be pushback from the U.S. Treasury team on this outcome.
The U.S. Treasury view should hold sway thru the summer. However, there is always the possibility that a hawkish ‘closer’ idea moves to the fore. In other words, keep your expectations relatively low: For now.
I also think it is fair to write this: As the global supply chain driven chip stocks go, so goes the remainder of this bull market. They are positively intertwined.
The reason is the U.S. China trade war’s end, however successful as a trade deal, will cause the chip stocks to rally more. I don’t see an independent cyclical rationale underpinning the chip stocks.
In the new “Cold War” between the U.S. and China, the U.S. seems to be winning so far—the U.S. dollar is booming while the China renminbi is sinking, and the Americans have a lot more Chinese imports they can penalize with tariffs than China does American imports. Chinese stocks have been hammered.
But Jack Ma, CEO of Alibaba (BABA - Free Report) , says it could take 10 years to resolve the U.S. China trade war. He thinks the U.S. will end up losing out more. Speaking at the South China Morning Post‘s China Conference in Kuala Lumpur in October 2018, Ma said the U.S. would “suffer more” and there was no logic behind the U.S.’s mass deployment of tariffs as a solution to the countries’ trade imbalance.
Alibaba executive VP Joe Tsai also spoke, saying the U.S. was reacting to its “unfounded fear that China’s rise is somehow going to threaten the national security and well-being of the American people.”
“It is really ill-advised for the United States to launch a war of some sort…thinking that they can treat China like the way they treated Russia by isolating the economy and bringing on pain,” Tsai said, as reported by the Post.
“We are so integrated that the pain is going to be felt all over the world. Everybody is going to feel the pain.”
Consider this real life war history —
War between Japan and the United States had been a possibility that each nation had been aware of, and planned for, since the 1920s. However, the relationship between the two countries was cordial enough that they remained trading partners. Tensions did not seriously grow until Japan’s invasion of Manchuria in 1931.
In mid-1940, President Franklin D. Roosevelt moved the Pacific Fleet from San Diego to Hawaii. He also ordered a military buildup in the Philippines, taking both actions in the hope of discouraging Japanese aggression in the Far East.
The Japanese high command was (mistakenly) certain any attack on the U.K.’s Southeast Asian colonies, including Singapore, would bring the U.S. into the war. A devastating preventive strike appeared to be the only way to prevent American naval interference.
On Dec. 7th 1941, The Attack on Pearl Harbor was a surprise military strike by the Imperial Japanese Navy Air Service against the U.S. naval base at Pearl Harbor, Hawaii Territory.
The attack, also known as the Battle of Pearl Harbor, led to the U.S. entry into WWII. Japan’s military leadership referred to the attack as the Hawaii Operation and Operation AI, and as Operation Z during planning.
Japan intended the attack as a preventive action to keep the U.S. Pacific Fleet from interfering with its planned military actions in Southeast Asia against overseas territories of the U.K., the Netherlands and the United States.
Over the course of seven hours, there were coordinated Japanese attacks on the U.S.-held Philippines, Guam and Wake Island and on the British Empire in Malaya, Singapore and Hong Kong.
What are some lessons?
A. It took the U.S. and Japan 20 years to get into a full-blown physical war. We have just two years until a new U.S. President is inaugurated. Campaigning in some respects has already begun. I don't see a different U.S. President carrying on with a one-sided U.S.-China trade war. China can always wait this one out, and see what happens.
B. Down any road, there are lots of incremental tit-for-tat escalations on both sides, to get into more serious straights. Perceptions can be very different on both sides. Either side can unilaterally make serious mistakes about the other side’s priorities. These can be catastrophic.
C. Trade with China — out of its once-European treaty ports — has always been, and likely always will be, a global hot button topic. It was the exploitation, as Europeans made trade colonies in China, which led to armed 1940s Pacific conflicts, in many respects.
D. Finally, history repeats when we forget it. Chinese treaty ports themselves emerged out of the unbalanced trade-driven Opium Wars in the late 1830s, a full century before. In short, this is not a new narrative. It’s just an old one — being re-visited myopically.
Zacks Sector/Industry/Company Telescope
A lot of downgrades — gratis the Q4 earnings season — did some damage to earnings fundamentals across the S&P 500 sector landscape. 5 of 10 sectors got downgraded this month.
The leaders are 2 defensive sectors: Health Care and Utilities.
Communication Services, with Telco Equipment included, had a dull Market Weight rating. Ditto Consumer Staples and Discretionary. However, Consumer Electronics, Non-food Retail, Media and Apparel showed up strong. These industries say consumer spending is fine.
Â¿Â¿Â¿Energy really went into the tank this month. But Materials were not far behind.
(1) Health Care stays a durable Attractive sector. The leader (with strong demographics) is Medical Care again.
Zacks #1 Rank (STRONG BUY) – Molina Healthcare (MOH - Free Report)
(2) Utilities stay at Attractive. The cold winter moves up the ranking of Utility Electric Power
Zacks #1 Rank (STRONG BUY) – Portland General Electric (POR - Free Report)
(3) Communication Services stays a Market Weight. Telco Services looks best.
Zacks #1 Rank (STRONG BUY) – Liberty Broadband Corp. (LBRDA - Free Report)
(4) Consumer Discretionary remains a Market Weight. The leaders are Consumer Electronics, Non-Food Retail/Wholesale, Media, and Apparel.
(5) Consumer Staples move down from Attractive to Market Weight. The leaders are Agri-business and Soaps & Cosmetics.
Â¿Â¿Â¿(6) Financials move down from Attractive to Market Weight. The leader is Insurance.
(7) Industrials move down 2 notches from Attractive to Unattractive. The leaders are Aerospace & Defense and Business Products.
(8) Info Tech moves down from Market Weight to Unattractive. The best is a neutral call on Telco Equipment. The Semis are blasé.
(9) Materials stay at Unattractive. The Containers & Glass and Metals Non-ferrous businesses are the best, but show up as neutral.
(10) Energy moves from Unattractive to Very Unattractive. Coal is the sole bright spot.