June 26, 2018

The Wall Street Journal reported last week that President Donald Trump asked U.S. Trade Representative Robert Lighthizer to identify an additional list of $200 billion in Chinese goods that would potentially be hit with additional tariffs. In the event that China keeps escalating its tit-for-tat tariff responses, President Trump said, “Further action must be taken to encourage China to change its unfair practices, open its market to United States goods, and accept a more balanced trade relationship.”

In my opinion, Wall Street’s adverse reaction to all this back-and-forth tariff escalation with China is just an excuse to take profits. These threatened tariffs are not intended to be permanent. They are used to negotiate a more favorable trade balance. President Trump reiterated his “excellent relationship” with Chinese President Xi Jinping, saying the two would continue working together on many issues.

To back up what I’m saying, Bloomberg featured an article last Wednesday entitled “Investors Agree with Trump: The U.S. Will ‘Win’ Any Trade War.”  Also on Wednesday, The New York Times featured an article entitled, “Trump’s Ace in the Hole in the Trade War: A Strong Economy.”  Essentially, the NYT pointed out that economic growth is slowing outside of the U.S., while economic growth is accelerating here at home; so the rest of the world is now more dependent than ever on us buying their products, so they have virtually no negotiating leverage. The Wall Street Journal also reported on Wednesday that Germany’s leading auto manufacturers are now in favor of the abolition of all import tariffs.

Although the German auto industry does not control the tariffs, clearly Germany has tremendous leverage in Brussels at the European Union (EU) headquarters. U.S. Commerce Secretary Wilbur Ross said that “Germany has the right approach to resolving this trade disagreement among friends,” adding that “if the EU were to reduce its 10% tariff on U.S. cars and trucks, that would be a positive first step toward trade that was more fair and reciprocal.”  Clearly, the threat of more U.S. tariffs is now breaking down trade barriers. In the end, this should result in more free trade, with fewer (and lower) tariffs.

Despite Negative Political News, “Positive Business Outlook” is at Record Highs

The economic news last week was generally positive – in one case reaching record-high levels of positive sentiment. On Wednesday, the National Association of Manufacturers survey reported that 95.1% of manufacturers reported a “positive outlook” for their companies. This is the highest-ever positive reading in the 20-year history of this survey. Between a robust manufacturing sector and higher consumer spending based on retail sales, second-quarter GDP growth is shaping up to be the strongest in several years.

On Thursday, the Conference Board announced that its leading economic indicators (LEI) rose 0.2% in May. The current conditions component also rose 0.2% while the lagging component (which looks at the last several months) rose a more impressive 0.5%. Most of the 10 LEI components continue to steadily rise, so economists’ consensus estimate of 3.7% annual GDP growth in the second quarter looks solid.

The Commerce Department announced on Tuesday that housing starts rose 5% in May to a 1.35 million annual pace, well above the economists’ consensus estimate of 1.3 million. New housing starts remain especially robust for single-family homes, coming in at a 936,000 annual pace. Housing starts are now at an 11-year high – the fastest rate since 2007 – and new building permits are up 8% in the past 12 months.

Meanwhile, existing home sales declined 0.4% in May to a 5.43 million annual rate, according to the National Association of Realtors, but this small decline is attributable to rising median prices, higher mortgage rates, and a lack of inventory. Currently, there is only a 4.1-month supply of existing homes on the market, which is substantially below the normal six-month inventory when the balance between buyers and sellers is considered neutral. As a result, it remains a “seller’s market” (the average home was only on the market for 26 days in May), until these new housing starts create a larger housing inventory.

About The Author

Louis Navellier
CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. *All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

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