August 21, 2018

This Thursday, August 23rd, a second round of U.S. tariffs is due to take effect on $16 billion in Chinese exports.  These tariffs are in addition to the $34 billion in tariffs the U.S. imposed on China in May.

President Trump recently threatened an additional 25% tariffs on $200 billion of Chinese exports, which could lead to tariffs on nearly half the $505 billion in China exports to the U.S. each year.  This last option is essentially the “nuclear option,” which was clearly designed to force China’s trade representatives back to the bargaining table. So guess what?  The Wall Street Journal reported last Thursday that negotiations with China will resume in late August. Clearly President Trump is being heard loud and clear.

What I find especially interesting is that the weak Chinese yuan makes China even more competitive, so China continues to set record trade surpluses with the U.S. almost every month.  Furthermore, the fact that Apple (AAPL) will likely announce its new iPhones in September means that the Chinese trade surplus will continue to rise, since iPhones have historically had a major impact on the overall U.S. trade deficit.

(Navellier & Associates does not own Apple in managed accounts, or a sub-advised mutual fund or in Navellier family accounts.)

Overall, I expect that the U.S. will ultimately prevail in these trade negotiations.  With almost a 4-to-1 advantage of Chinese exports to the U.S. vs. U.S. exports to China, the U.S. has the upper hand; but until Apple and other big multinational companies divert their manufacturing away from China, the Chinese trade surplus will likely continue to set new records most months for the foreseeable future.

Germany and the U.S. Seem Untouched by Turkish Crisis

Wall Street last week was stressing about Turkey imposing new trade sanctions on the U.S., even though there are not a lot of exports from Turkey to the U.S. other than “Gummy Bears,” which are predominately made in Turkey. On a more serious note, the collapsing Turkish lira is expected to hurt European banks, which in turn will likely cause the European Central Bank (ECB) to remain accommodative. In the end, a cautious ECB will also make our Fed be less likely to raise key interest rates beyond September.

Turkey is not a major trading partner with Germany, so outside of some German banks, it appears that Turkey’s currency and economic crisis will not have an adverse impact on German GDP growth. Last week, we learned that Germany’s second-quarter GDP grew at a 1.8% annual pace. Germany’s first-quarter GDP growth was also revised up to a 1.5% annual pace from the 1.2% previously estimated.

In the U.S., the Commerce Department on Wednesday announced that retail sales rose 0.5% in July, slightly better than the economists’ consensus estimate of 0.4%. June’s retail sales were revised down to a 0.2% increase from the 0.5% increase previously reported. Excluding vehicles and gas station sales, retail sales in July rose at a very healthy 0.6% pace. In fact, July’s retail sales were very healthy for all but a few categories. In the past 12 months, retail sales have risen at a healthy 6.4% annual pace.

The Labor Department announced on Wednesday that productivity rose to a robust 2.9% annual rate in the second quarter, the strongest annual pace in more than three years. Ironically, in the past 12 months, productivity only grew at a 1.3% annual pace, so the second-quarter surge in productivity bodes well for possible upward GDP revisions. Most of the productivity gains are attributable to the service sector and recent business investment to boost productivity due to a tight labor market. Overall, the surge in second-quarter productivity is very bullish for continued strong GDP growth.

And finally, the Conference Board on Friday announced that its Leading Economic Indicators (LEI) rose 0.6% in July, slightly better than economists’ consensus expectation of a 0.5% increase. This means that the U.S. is not headed for a recession any time soon, so the bull market remains on firm footing.

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Louis Navellier
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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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