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- Trump has been in a back and forth tariff battle with the Chinese for months and now has indicated that the EU may be subject to tariffs
- This is creating a tit for tat trade war between the world’s two largest economies, the United States and China
- As these trade war exchanges between the U.S. and China, in particular, unfold, world markets have experienced increased volatility
- Multinational companies are starting to voice concern that these trade fears are becoming the most significant risk to their respective businesses
- Multinationals just as 3M (MMM), DowDuPont (DWDP), United Technologies (UTX), General Electric (GE), Boeing (BA) and Caterpillar (CAT) have been under weakness as the tough trade rhetoric continues
Trade War Rhetoric Heats Up
Reports indicated that the Trump administration planned to block many Chinese companies from investing in domestic technology and block additional technology exports to China. It was reported that the administration was drafting rules that would apply to companies with at least 25% Chinese ownership from buying companies involved in "significant industrial technology." Despite these reports, Peter Navarro, a top trade advisor, said the market was overreacting to fears the administration would restrict foreign investment as part of its trade actions against China and other countries. "There are no plans to impose investment restrictions on any countries that are interfering in any way with our country. This is not the plan," he said. He insisted that markets were taking the wrong message from the reports, stating, "I would say more broadly I think today's market reaction is a very large overreaction," Navarro said. "What we have here with Trump trade policy is a tremendous success for this country and this market. It's very bullish." Going further, Treasury Secretary Steve Mnuchin stated that all of President Trump’s advisors were unanimous on the Chinese investment restrictions and that any mixed messages were unfortunate. Hence, part of the uncertainty that corporations and foreign governments are voicing concern.
Trump has taken the trade fight to the Chinese and tensions have been escalating for months starting with initial tariffs on goods worth $34 billion which are expected to be active on July 6th. China hit back and announced retaliatory tariffs on U.S. imports. On June 15, the administration announced that it would impose a 25 percent tariff on up to $50 billion of Chinese products. Three days later on the 18th, Trump said he had requested that the United States Trade Representative identify $200 billion worth of Chinese goods for potential additional tariffs at a rate of 10 percent. Initially, Trump implemented tariffs on imported steel and aluminum and had since extended these tariffs to target China specifically and to an extent the European Union. China has been widely considered to engage in unfair trade practices, specifically about intellectual property as it pertains to the United States. China is notorious for limiting foreign companies' access to its market and compels foreign companies to partner with domestic Chinese companies if they want to operate within its country while requiring foreign companies to hand over technological expertise in exchange for market access. As a consequence of these ostensibly unfair trade practices and intellectual property theft Trump has ratcheted up tough trade policy.
U.S. Trade Policy Becoming Biggest Risk
Per CNBC Global CFO Council, trade uncertainty has elevated to become the most significant risk for corporations translating into 35% of global CFOs stating that the U.S. trade policy is the biggest external risk to their company up from 12% in the Q4 2017. The short-term negative sentiment was apparent as 65% of CFOs stated that U.S. trade policy is likely to impact their companies over the next six months negatively. Despite this negative commentary, 60% of CFOs noted that the tax reform benefits remain to be realized and the uncertainty around trade policy is hindering their ability to capitalize on tax reform.
As these trade policy risks lurk in the backdrop, there’s vacancies and uncertainty within the economic team. The director of the National Economic Council, Larry Kudlow is in the midst of filling critical roles within the council. Per reports, Kudlow is considering Dan Clifton, head of policy research at Strategas Research Partners, for the position of deputy director. Clifton is among a handful of candidates for a deputy or chief of staff role, a slate that includes senior officials at other government agencies. Kudlow is also considering bringing on Stephen Moore, an economist, conservative commentator and close personal friend of Kudlow’s for a senior advisory role. Moore was one of the early crafters of Trump tax plan. Before the 2016 election, Kudlow and Moore visited members of Congress to lobby and sell the importance of tax reform. The National Economic Council currently has an opening that includes the senior roles in leading the infrastructure and agricultural policy.
Stocks and Conclusion
It comes to no surprise that the markets have witnessed increased volatility as a result of increased trade war fears and uncertainty. Multinational corporations have been under weakness as the uncertainty lingers about trade policy within the administration. Furthermore, trade uncertainty has become the most significant risk factor for corporations as the U.S. trade policy is likely to impact certain companies over the next six months negatively. Multinationals just as 3M (MMM), DowDuPont (DWDP), United Technologies (UTX), General Electric (GE), Boeing (BA) and Caterpillar (CAT) have been under weakness as the tough trade rhetoric continues. Technology powerhouses such as Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOG) are unlikely to be impacted in any material way as they do not derive their revenue from the Chinese market. Thus, focusing on U.S. centric stocks may provide insulation from the international implications of trade between the U.S. and China. It’s noteworthy to point out that many multinational companies trade at historic at multi-year lows and may represent a bargain.
Disclosure: The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of stockoptionsdad.com a venue created to share investing ideas and strategies with an emphasis on options trading.