June 19, 2018

Stocks opened lower this morning (Dow -281 pts; SPX -.55%) mostly on trade war jitters. Industrials and materials—two sectors heavily influenced by global trade—are down about 2%; tech is down about 1.1%. The defensives—consumer staples, utilities, telecom—are trading higher in today’s mini sector rotation. The VIX Index jumped up to nearly 14 and VIX July futures are trading up around 14.4. European stock markets look to close down about 1% and Asia was very negative overnight. The Shanghai Composite Index fell 3.8% and is now down over 11% year-to-date. Most commodities—including gold—are down today. WTI crude oil fell 1.4% to $64.90/barrel on rumors that Saudi Arabia and Russia would like to remove OPEC oil production limits. Of course, we know that oil prices are routinely manipulated day-to-day by rumors and we know that Saudi would much rather have oil up around $80 than down around $60. Bonds are trading higher this morning in response to the stock selloff. The 5-year and 10-year Treasury yields dipped to 2.76% and 2.89%, respectively. 

It looks as though President Trump wants to push this trade tariff fight with the Chinese to find out who really has leverage. We’ve been long conditioned to believe the US has absolutely no leverage against an abusive trade partner with a penchant for stealing intellectual property. We’ll see. Mr. Trump asked the US Trade Representative to identify another $200bil worth of Chinese goods for additional tariffs at a 10% rate. That is in addition to the 25% tariff recently placed on $50bil worth of imports from China. CNBC’s Jim Cramer says he’s not too worried because the Chinese stock market will create a lot more pain for them than our stock market will create for us. In other words, we have more staying power. Of course, other strategists have warned that China may retaliate with specific action against large US companies like Apple (AAPL) and Boeing (BA), which have been market leaders. So depending on China’s response in the coming days, we could easily see the SPX fall back to February lows. 

Strangely enough, it looks like the stock market can’t decide how to react to a potential trade war. Yesterday, the defensive sectors like telecom and consumer staples were beaten mercilessly. The reasons given: 1) the cost of imported goods will certainly rise, hurting profit margins for manufacturers who may have a hard time raising product prices; 2) US companies selling into the Chinese market would be less competitive with 10-25% tariffs. That would apply to packaged goods companies like Procter & Gamble (PG), which was down 2% yesterday. But it certainly wouldn’t have any impact on Altria (MO) and AT&T (T), which were down 2-3%. Many other stocks were hit hard on no specific news (Travelers down 1.3%). As noted above, the staples and telecoms are up today. 

US housing starts rose 5.0% in May to an annualized rate of 1.35 million units. That’s the highest rate of new construction units since the housing crisis, and we’re really only building enough housing to offset population growth. Demand is still ahead of supply in the US, driven by a tight labor market and relatively low mortgage rates. The good news is that we’re finally seeing a jump in single-family construction rather than multi-family, which is really saturated. Bloomberg notes homeownership rates in the US are finally moving up after hitting a 5-year low in 2016. 

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