Trade War And Peace
“Summertime, and the livin’ is easy.” Well. maybe, but George Gershwin wasn’t writing about the stock market. As the market begins its period of reduced volume, it may be subject to price spikes before it reaches the fall’s season of steadying stock prices.
Today’s financial news brings a swirl of competing currents. The most critical come from the current Administration’s repeated threats to start a trade war with China. This Friday, the Administration plans to impose $38 billion of new tariffs, which are expected to prompt immediate retaliatory tariffs from China.
The current Administration has opened multiple fronts, imposing new tariffs on steel, aluminum, solar panels and even washing machines from Canada, Mexico, the European Union and Japan. These are serious threats to the U.S. economy while the most threatening is the developing clash between the world’s two largest economies.
It is unclear how these trade wars may end, if indeed they end at all. Alternating threats have replaced negotiations, making it increasingly difficult for the political leaders to walk back from the brink.
The strongest card held by the U.S, is its increasingly strong economy. The Federal Reserve reaffirmed these strengths in its latest Open Market Committee minutes release on Thursday. The Fed raised interest rates a quarter point for the second time this year and now expects a total of four this year, up from its estimate of three in March.
The Fed noted “uncertainty and risks associated with trade policy eventually could have negative effects on business sentiment and investment spending.” It also noted that the economy is expanding beyond expectations, the most major factor providing tailwinds for investors as they anticipate a new wave of corporate earnings reports.
Oil prices are rebounding, boosting top oil and gas producers toward a second straight quarter of record earnings. Their stock prices have recently moved ahead of technological companies and current trends indicate this will continue into the fall. Current buys are Royal Dutch Petroleum (RDSA-$69), ConocoPhillips (COP-$68) and Occidental Petroleum (OXY-$84). All three pay dividends with Royal Dutch the highest at a current rate of 5.4%. Diamondback Energy (FANG-$131), a Texas exploration and production company is a more aggressive buy recommendation.
AbbVie (ABBV-$94) offers an unusually high yield of 4.1% for an advanced medical technology stock. Its price momentum slowed this year on disappointing results from a new drug and concerns from developing competition for its leading arthritis drug. AbbVie has a deep pipeline that is particularly strong in immunology and oncology.
It will report earnings toward the end of this month and current estimates for the quarter are for $1.98, up from $1.88 90 days ago and from $1.42 actual earnings last year. Estimates for all of 2018 are for $7.80, up from $5.60 a year ago. That is a very reasonable valuation for stock of this caliber and one of its directors clearly agrees, having just bought 5,400 shares of AbbVie.
The Consumer Discretionary sector is strengthening. Nike (NKE-$76) jumped $7 after reporting earnings that beat analyst estimates. Its own forecast was for solid growth around 12% with its next report due in September.
V.F. Corporation (VFC-$81) is a new buy in this sector. The North Carolina-based company makes jeans and other apparel together with accessories and work clothes. Familiar brands include The North Face, Timberland, Lee, Wrangler and Eagle Creek. This is a very steady company that has raised its dividend for 45 straight years. Earnings are due July 20 and should show the company on its way to $3.55-$3.60 for the current year, up from $3.14.
Summertime is bringing new concerns from worldwide. Over the past week, numerous locations in the Northern Hemisphere have reported their hottest weather ever recorded. In Northern Siberia along the Arctic Ocean, temperatures reached 90 degrees. Denver reached 105 and Montreal 98 degrees while Burlington, Vt. set its all-time warmest low temperature of 80 degrees. Scotland and Ireland set new record highs and Yerevan, the capital of Armenia, was over 107 degrees and Quriyat, Oman reported the world’s hottest low temperature ever recorded of 109 degrees.
Collectively, these records reflect the extremes we can expect to increase in a warming world. Global economies are growing and global cooperation is critically needed to address global warming, trade conflicts and immigration issues.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622