The following is an excerpt from Zacks Chief Strategist John Blank’s full Apr Market Strategy report To access the full PDF, click here
Resolving the U.S.-China trade war. That is a key fundamental earnings and revenue growth factor underpinning the next leg of this long U.S. bull market.
I am of the strong opinion it will not be the details of the U.S. China trade deal itself that rally stock markets more, sometime this spring or summer. It will simply be the lifting of tariffs.
Without lifting tariffs, I can’t see the global growth situation improving. Tariffs took down global growth last summer. Only lifting tariffs can restore the same growth.
Let’s make sure we remember how the U.S. got here —
The Trump tariffs were imposed by executive order (not by act of Congress) during the presidency of Donald Trump as part of his economic policy.
- In January 2018, Trump imposed tariffs on solar panel and washing machines of 30 to 50 percent.
- He soon imposed tariffs on steel (25%) and aluminum (10%) from most countries. On June 1st, 2018, this was extended on the European Union, Canada, and Mexico. The only countries that remain exempted from the steel and aluminum tariffs are Australia and Argentina.
- Separately, on July 6th, 2018 the Trump administration set a tariff of 25% on 818 categories of goods imported from China worth $50 billion.
The tariff history of the United States spans from 1789 to the present —
(1) The first tariff law passed by the U.S. Congress, acting under the then-recently ratified Constitution, was the Tariff of 1789. Its purpose was to generate revenue for the federal government (to run the government and to pay the interest on its debt), and also to act as a protective barrier around newly starting domestic industries. Treasury agents collected an import tax set by tariff rates before goods could be unloaded at U.S. ports.
(2) Tariffs have historically served a key role in the nation's foreign trade policy and as a source of federal income. Tariffs were the greatest (approaching 95% at times) source of federal revenue until the Federal income tax began after 1913. For well over a century the federal government was largely financed by tariffs averaging about 20% on foreign imports.
(3) Tariffs were the main source of all Federal revenue from 1790 to 1914. At the end of the American Civil War in 1865 about 63% of Federal income was generated by the excise taxes, which exceeded the 25.4% generated by tariffs. In 1915 during World War I tariffs generated only 30.1% of revenues. Since 1935, tariff income has continued to be a declining percentage of Federal tax income.
(4) Woodrow Wilson made a drastic lowering of tariff rates a major priority for his presidency. The 1913 Underwood Tariff cut rates, but the coming of World War 1 in 1914 radically revised trade patterns. Reduced trade and, especially, the new revenues generated by the federal income tax (bolstered by the ratification of the Sixteenth Amendment in 1913) made tariffs much less important in terms of economic impact and political rhetoric.
(5) After the WWII, the U.S. promoted the General Agreement of Tariffs and Trade (GATT) established in 1947, to minimize tariffs and other restrictions, and to liberalize trade among all capitalist countries.
(6) In 1995 GATT became the World Trade Organization (WTO); with the collapse of Communism its open markets/low tariff ideology became dominant worldwide in the 1990s.
Presidential quotes of note—
President Trump has plenty of tariff-enacting company -- respected U.S. Presidents from the past (just not many U.S. Presidents from the last century).
Here are a few nice quotes to show that:
(A) "I use no porter or cheese in my family, but such as is made in America," the inaugural President George Washington wrote, boasting that these domestic products are "of an excellent quality."
One of the first acts of Congress Washington signed was a tariff among whose stated purpose was "the encouragement and protection of manufactures.”
In his 1790 State of the Union Address, Washington justified his tariff policy for national security reasons: “A free people ought not only to be armed, but disciplined; to which end a uniform and well-digested plan is requisite; and their safety and interest require that they should promote such manufactories as tend to render them independent of others for essential, particularly military, supplies.”
(B) After the War of 1812, Jefferson's position began to resemble that of Washington, some level of protection was necessary to secure the nation's political independence.
He said: “Experience has taught me that manufactures are now as necessary to our independence as to our comfort: and if those who quote me as of a different opinion will keep pace with me in purchasing nothing foreign where an equivalent of domestic fabric can be obtained, without regard to difference of price.”
(C) Henry Clay's longtime rival and political opponent, President Andrew Jackson, in explaining his support for a tariff, wrote:
“We have been too long subject to the policy of the British merchants. It is time we should become a little more Americanized, and, instead of feeding the paupers and laborers of Europe, feed our own, or else, in a short time, by continuing our present policy, we shall all be paupers ourselves.”
(D) President Abraham Lincoln declared, "Give us a protective tariff and we will have the greatest nation on earth." Lincoln warned, "The abandonment of the protective policy by the American Government… must produce want and ruin among our people."
Lincoln similarly said that, "if a duty amount to full protection be levied upon an article" that could be produced domestically, "at no distant day, in consequence of such duty," the domestic article "will be sold to our people cheaper than before."
(E) President Theodore Roosevelt believed that America's economic growth was due to the protective tariffs, which helped her industrialize.
He acknowledged this in his State of the Union address from 1902:
“The country has acquiesced in the wisdom of the protective-tariff principle. It is exceedingly undesirable that this system should be destroyed or that there should be violent and radical changes therein. Our past experience shows that great prosperity in this country has always come under a protective tariff.”
In sum, the WWI and WWII era caused U.S. Presidents to shift course and lower tariff rates to stimulate the global economy, as the world was coming out of those conflicts.
It remains to be seen if the U.S. China trade war has it right, in calling for a new global trade regime; with higher tariff barriers protecting manufacturers and steel makers and the like from low-cost competition.
Will the change in direction to higher tariffs be reversed in due course, by another election?
Or ignored or altered substantially by the U.S. Congress?
We shall see.
Zacks April Sector/Industry/Company Telescope
At 2,872 on the S&P500, this market now 3.0% from its 52-week high at 2,961. All the action for stock pickers is at an industry level, not a sector level now.
The top sectors this month are Health Care, Industrials, Communication Services and Financials. That is notably different than last month. Look into 5G Telco Services and Business Products industries on estimate upgrades.
Want more bright industry spots? First, there is a broad upgrade to Financials. Strong stocks helped Investment Funds. The Insurance industry is deeply cyclical. Materials put in a poor sector showing again. But Steel and Metals Non-ferrous are doing well. It pays to look at the industry level here too. Info Tech got an upgrade this month. Notably, Semis are back to neutral.
(1) Health Care moved down one notch to Attractive from Very Attractive. The leader (with strong demographics) is Medical Care again.
Top Zacks #2 Rank (BUY) Stock — Anthem Inc. (ANTM - Free Report)
Anthem Inc. is a health care company. The company provides medical products, through its subsidiaries. It operates through Commercial, Consumer and Other segments. The company offers managed care plans to the large and small employer, individual, Medicaid and senior markets.
Anthem, Inc., formerly known as WellPoint, Inc., is headquartered in Indianapolis, Indiana.
(2) Industrials moved down one notch to Attractive from Very Attractive. The leaders are Aerospace & Defense and Business Products.
Top Zacks #2 Rank (BUY) Stock — AeroVironment (AVAV - Free Report)
AeroVironment, Inc. designs, develops, produces, operates a portfolio of products and services for government agencies, businesses and consumers.
It operates through two segments: Unmanned Aircraft Systems, which focuses primarily on the design, development, production, support and operation of UAS and tactical missile systems that provide situational awareness, multi-band communications, force protection and other mission effects, and Efficient Energy Systems, which focuses primarily on the design, development, production, support and operation of electric energy systems.
The company supplies UAS, tactical missile systems and related services primarily to organizations within the United States Department of Defense.
The company also supplies charging systems and services for electric vehicles, and power cycling and test systems to commercial, consumer and government customers.
It serves the U.S. Department of Defense, including the U.S. Army, Marine Corps, Special Operations Command, Air Force, and Navy.
(3) Communication Services rises one notch to Attractive from Market Weight. Telco Services looks best again.
Top Zacks #1 Rank (STRONG BUY) Stock— Knowles Corp. (KN - Free Report)
Knowles Corp. operates as a supplier of advanced micro-acoustic, specialty components, and human interface solutions.
The company designs and manufactures acoustic products, including microphones, speakers, and receivers for the handset, tablet, and other consumer electronic markets.
It also designs and manufactures electronic components used in medical and life science applications and solutions and components used in communications infrastructure and various other markets.
Knowles Corporation is headquartered in Itasca, Illinois.
(4) Financials move up one notch to Attractive from Market Weight. The two leaders are Investment Funds and Insurance.
(5) Consumer Staples moved down one notch to Market Weight from Attractive. The leaders are Misc. Staples and Soaps & Cosmetics.
(6) Consumer Discretionary remains a Market Weight. The leaders are Apparel, and Media. Publishing looks awful.
(7) Utilities stay a Market Weight. Spring is here. Better weather means less excess power use.
(8) Energy moves up one notch to Market Weight from Unattractive. Coal again.
(9) Info Tech moves up two notches to Market Weight from Very Unattractive. The best is a neutral call on Computer-Office Equipment. Semis look neutral now.
(10) Materials stay at Very Unattractive. But Steel and Metals Non-ferrous industry are bright spots. Tariffs for steel and the VALE debacle for iron ore.