October 15, 2019

The great buildup to last week’s trade talks to gain progress with China was in my estimation a “Swedish meatball served on a platter,” designed to do nothing more than have the Chinese buy more American farm products if China will just dial back the practice of government-sponsored currency manipulation. As a reward of sorts, the proposed hike in existing tariffs set for October 15 will be suspended for now.

To correct President Trump’s statement, I’d say there was nothing “very substantial” in this “Phase One” deal that I can see, and the devil is always in the details. Everything that went down last Thursday and Friday was by oral agreement. The terms of the deal will be written down over the next three to four weeks, right before the next set of tariffs, slated for December 15, are set to be activated. My take is that this U.S./Sino gathering was less on substance and more for optics, in order to appease global markets.

None of the hard structural issues were addressed during the talks – not cyber hacking, or cracking down on IP theft, or Huawei’s blacklisted products, or forced transfer of technology to gain access to markets, or subsidizing state-owned companies, or the dumping of products and commodities at below market rates to sabotage U.S. companies, or the export of fentanyl that resembles the Opium Wars of the 1800s.

China's Seven Deadly Sins Pictograph

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

There was also some nebulous language in the agreements that would strengthen Chinese protections for American intellectual property and give financial services companies more access to China’s market, but there is no mention of transparency or accountability procedures or blueprints of how to realistically make this happen, as that would involve a change in China’s rule of law; but Treasury Secretary Steve Mnuchin was found stating, “You know, we’re very, very close to a deal on that,” – but again, no outline or details.

Both President Trump and President Xi wanted a political victory, and the only way to attain that was to avoid talking about what got us into this trade war in the first place. I won’t be the least bit surprised if we hear from China that they had a different understanding of the issues that emerged from the talks and then we’re back to square one. For instance, when the topic of Chinese companies listed on U.S. exchanges being required to open their books or run the risk of being delisted and banned from U.S. pension funds, tensions will be back on the rise again – and this action is making its way through Congress right now.

Use This “Hopium” to Buy Defensive Dividend Stocks

You can call this hope of a China deal lifting the market as a sort of “hopium” for a new China deal. When one considers the confluence of a partial trade deal with China, a possible breakthrough in the Brexit negotiations between the UK and the EU, and the Fed announcing stepped up overnight Repo operations that will continue through January, one would think the stock market is on brand new footing for new all-time highs just ahead – and this might come to be, if earnings season delivers on the upside.

But let’s take stock of what the market has yet to overcome. There is no timeline to remove any of the existing tariffs, there has been no progress on Chinese companies adhering to U.S. accounting standards, and the temporary trade war truce does little to change the narrative of slowing growth for 2020.

Chris Krueger, senior policy analyst at Cowen, said in a recent note to clients: “Tariffs have been the tip of the spear in Trump’s trade wars,” but “the next fronts — capital flows, [more] export controls, supply chain duress, industrial policy — are the global plumbing of the real economy.” The impact of this next round, Krueger said, “can produce exogenous shocks to the global system that can dwarf the tariffs.”

So, with the understanding that there is a lot more geopolitical wood to chop, there are a couple of things that stand out that investors can be confident of. First, under the slower-growth model, the Fed will likely keep cutting interest rates and boosting liquidity, of which a portion will find its way into equity markets. Second, bond yields will stay low and drive global capital flows into U.S. stocks with juicy dividend yields positioned in the defensive sectors – namely utilities, telcos, REITs, defense, and consumer staples.

United States Ten Treasury Yield Chart

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

Bond yields spiked last week. The benchmark 10-year Treasury Note moved from 1.54% on Wednesday up to 1.76% as of Friday’s close. Hence, most high-dividend defensive stocks traded lower as “hopium” for a re-acceleration in profit growth and the high-beta growth stocks took temporary hold of investor sentiment. No one would welcome this rotation more than me, but my view is that it’s premature and that a resumption of S&P earnings growth and P/E multiple expansion is much further out.

For the great majority of our client base at Navellier & Associates, who view dividends and yield as the most important aspect of their portfolios, we are getting another window of opportunity for attractive entry points on pullbacks, locking in solid yields in companies that have strong histories of raising dividends while being invested in sectors that are recession-resistant. While no one has a crystal ball as to what the road ahead will deliver, buying the current dip on defensive dividend stocks looks very timely.

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


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