The following is an excerpt from Zacks Chief Strategist John Blank’s full Sep Market Strategy report To access the full PDF, click here
Out in the open, I am going to craft a logical strategic plan.
It will conclude with one big idea: there is a LOW probability for a resolution to the U.S.-China trade war… at least one that happens before the U.S. Presidential election in November 2020.
I also conclude that this is BULLISH, not bearish.
Pessimistic sentiment (like mine) is already baked into stock prices. That implies this: stocks can – and likely will – climb the proverbial wall of worry.
It may not be a durable share-price climb, though. Which fits with the volatile stock market picture we have seen over the last 18 months, too.
How to end the U.S.-China trade war?
A first solution starts with stand-alone bilateral talks on intellectual property issues. These U.S.-China talks, over time, must broaden later to key international partners.
There are two different political economy problems, to isolate, as I see it:
- Number one, the FBI has “1,000 investigations into Chinese intellectual property theft.” This quote published on July 24th, 2019
- Set up a working group with the Chinese
- Use the FBI case detail
- Get to the granularity
- Identify multiple solutions
The second solution is internal and domestic – solely to the USA:
- The second problem is the overall U.S. bilateral trade deficit with China
- This is largely U.S. overconsumption, caused by huge and growing U.S. Federal deficits
- Set up a bipartisan U.S. commission to balance the Federal budget in perhaps two to three years
- Quit blaming the Chinese for it
- Own it!
Third, end tariffs unilaterally to restore global growth, whilst two sets of negotiations unwind issues.
In light of this, when does the self-created U.S. trade war with China end? It likely ends no sooner than the U.S. Presidential election in November 2020:
- U.S. tariffs won’t end until the U.S. President is gone
- Respect for the FBI won’t happen until the U.S. President is gone
- A bipartisan budget committee won’t happen until the U.S. President is gone
Ultimately, that is why U.S. recession risk got so high (30% to 50%). More observers gave up hope on a well-reasoned approach like this.
To finish, I set up three scenarios and their respective probabilities for you—
- Worse-case scenario: ‘Tit-for-Tat’ escalation gets worse and worse. (30% odds)
- Base-case: The trade war remains stalled. The Chinese ‘wait it out.’ Tensions end no sooner than the November 2020 election. (50% odds)
- A best-case scenario? I would imagine the U.S. President sends fresh faces to address matters in Beijing. A new trade arrangement would land sometime before the election. (20% odds)
Zacks September Sector/Industry/Company Telescope
September Zacks Industry Ranks show defensives at the top and the bottom.
Analysts like Health Care and Staples. They hate Telcos and Materials.
The big positive surprise was a sector upgrade for the Industrials sector to Attractive. The big negative surprise was a downgrade to Consumer Discretionary.
Two notable major sectors treading water are Finance and Info Tech.
Materials and Energy were lagging at the back. These global economy sectors struggle to gain traction in the face of the multiple trade war uncertainties.
(1) Health Care stays at the top with a Very Attractive rating. The leaders are Drugs and Medical Products.
Top Zacks #1 Rank (STRONG BUY) Stock—Roche Holding AG ((RHHBY - Free Report) )
This is a major Swiss multinational Pharma and Diagnostics company.
It is a research-based, product-focused organization dedicated to the discovery and early clinical development of pharmaceuticals and drugs, fine chemicals and vitamins, fragrances and flavors, diagnostic equipment and liquid crystals.
The company distributes its products throughout Europe, the United States, Asia and Latin America.
(2) Consumer Staples stays at Very Attractive. The industry leaders are Food, Beverages and Tobacco. That spells out a lot of summer gatherings going on.
Top Zacks #1 Rank (STRONG BUY) Stock—Rent-A-Center ((RCII - Free Report) )
A rent-to-own industry leader, Plano, Texas-based Rent-A-Center, Inc., is focused on improving the quality of life for its customers by providing them the opportunity to obtain ownership of high-quality, durable products such as consumer electronics, appliances, computers, furniture and accessories, under flexible rental purchase agreements with no long-term obligation.
Rent-A-Center Franchising International, Inc., a wholly owned subsidiary of the company, is a national franchiser of the rent-to-own stores operating under the trade names of Rent-A-Center, ColorTyme and RimTyme.
(3) Industrials get a noted upgrade to Attractive. Business Products are very strong. And Pollution Control, Aerospace & Defense, Airlines, Conglomerates and Railroads were all lifted up.
Top Zacks #2 Rank (BUY) Stock—Avery Dennison ((AVY - Free Report) )
This is a U.S. multinational, with operations in more than 50 countries and more than 25,000 employees worldwide. It is headquartered in Glendale, California.
Avery Dennison is a global leader in pressure-sensitive label and functional materials and labeling solutions for apparel. The company's applications and technologies are an integral part of products used in every major industry.
Avery Dennison serves customers in the consumer packaging, graphical display, logistics, apparel, industrial and healthcare industries.
(4) Info Tech is a Market Weight. I see Computer Software-Services is the best. Misc. Tech is good too. The Semis are treading water.
(5) Financials are a Market Weight. The sole strong spot is Finance. That says the consumer is spending.
(6) Consumer Discretionary falls to Unattractive. The two leaders are Publishing and Non-Food Retail/Wholesale. The three big losers are Autos/Tires/Trucks and Media and Home Furnishing-Appliances.
(7) Energy falls to Unattractive. The sold strong area is Oil & Gas Drilling.
(8) Utilities are at Unattractive.
(9) Materials fall to back at Very Unattractive. There are no strong sectors.
(10) Communication Services is also a Very Unattractive sector.
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