May 21, 2019

This past week of elevated market volatility seems to be clearly reflecting a stark new division in trade relations with China and a rising level of future uncertainty about the implications of the new higher tariffs implemented by both the U.S. and China. Investors now know that China is going to hike their existing $60 billion tariff tranche rate from a 5%-10% range to a floating 5%-25% range, starting June 1, in retaliation to the U.S. raising its tariff rate on $250 billion of Chinese imports from 10% to 25%.

As of the closing bell last Friday, there was obviously no deal made, with no sense that either side is about to give an inch on their newly-entrenched positions. China’s President Xi Jinping misjudged President Trump’s zeal to do a deal and also miscalculated how hard his trade team should press American trade representative Robert Lighthizer, who has Mr. Trump’s full trust in the matter.

The fissure in the deal was the U.S. demand that China set forward some changes in its domestic laws so as to achieve accountability standards that senior Communist party leaders saw as “caving in” to the U.S. Sadly, this latest set of circumstances puts the Asian “saving face” cultural syndrome into the global spotlight after China substantially altered the terms that had been verbally settled on at the last minute.

The concern going forward is that because of China’s top-down political structure, it is likely that any new rhetoric out of China will be combative and nationalistic, leaving little room to pick up trade talks where they left off. Without verifiable systems in place to protect and weigh justice against violations, in my estimation, tariffs will be in place for a long time, and, quite frankly, the most important takeaway from this standoff is that China was clearly willing to make promises that it never intended to keep.

Looking at how this trade war will affect China’s future rate of GDP, the Organization for Economic Co-operation and Development (OECD) is forecasting China’s growth rate to slow to 5.5% in 2020, then fall below 4% in 2025 and below 3% by 2030. How accurate are the OECD forecasters? Well, they published an internal report and found that the OECD tended to be too optimistic about eurozone growth. Given China’s current debt-to-GDP ratio of about 300%, it stands to reason that a protracted trade war with the U.S. would only bring those future lower growth rate numbers lower – and sooner than expected.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Emperor Xi Has No Clothes

Now, President Xi has backed himself into a political and cultural corner that has the risk of only getting messier. James Green, who was the top trade official at the United States Embassy in Beijing until last August, said, “Xi has tightened the overall policy atmosphere, so few want to voice opposition,” which means, “that doesn’t leave much room for the negotiators” (source: New York Times, May 16, 2019).

The latest impasse spotlights China’s egregious behavior and puts their duplicity on full display around the world. Once again, we must all learn that doing business on a transparent level with a communist regime is fraught with risk and prone to failure. Now, the Trump administration is preparing to hit China with 25% tariffs on the balance of the $300 billion that China exports to the U.S., while aggressively pushing American and foreign manufacturers to move supply chain operations out of China altogether.

A flight of investment capital from a devalued yuan – which is being manipulated by China’s government to offset the cost of tariffs – and large multi-national businesses hitting the exits to set up shop in other Asian nations is probably the only way China will buckle to terms the U.S. can accept. Until then, the stock market, which only recently set new highs, will be under pressure to reset its growth expectations.

Rate-cut expectations began inching higher, even though Fed Chairman Jay Powell said he does not see the need to move the fed funds rate in either direction at this time. According to the CME FedWatch Tool, the implied likelihood of a rate cut in October increased to 55% from 42%. The fed funds futures market sees a 71% likelihood of a rate cut in December, up from 57.4% two weeks ago, and the odds of a rate cut in January 2020 increased to 74% from 62%, so talk of rate cuts replace previous talks of rate increases.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What is the bond market telling investors? It’s saying that the U.S. economy will grow, but at a slower pace. To me, this means that investors should allocate more capital to defensive blue-chip stocks paying high dividend yields, and to stocks that are growing their dividends aggressively. Under this scenario, capital flows into those areas that will likely be the most bullish, because they’re the best game in town.

And when I say, “in town,” I mean “in the whole world.”

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry


Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives