Stocks slipped yesterday on the first trading day AFTER a strong month for stocks as traders repositioned for the bumpy road ahead. Two key PMIs, released yesterday, registered a noticeable slowdown in US manufacturing prompting speculation that the Fed hikes are taking their toll.
Old sabers rattle anew. It is probably the farthest thing on investors’ minds these days, but a new blip on the radar is getting bigger…and closer. Investors have been highly focused on what many are now calling a technical recession in the US, a result of consecutive declines in GDP in Q1 and Q2 this year. Though there is still much mystery around the “recession” label, a declining economy is something that warrants a close watch, lest its slip into a more painful decline which includes the potential for mass unemployment. Don’t worry, we are not there yet. Also, on the center of the radar are rising interest rates. The Fed is raising them and that is costing borrowers of all shapes and sizes discomfort. Those rate hikes have also caused discomfort for growth stock investors over the past 9 months as higher yields have caused them to languish (yields and growth have become highly inversely correlated). Finally, there is the pain caused from eye-watering inflation. Those alone are enough to exhaust even the most seasoned investors. But, what of this new blip alluded to earlier?
The US and China have had a complex relationship for the past few decades. China has quickly emerged as the second largest economic power on the globe, behind the US. It surely did not happen overnight, but its implications for investors took many by surprise in the past few years. Perhaps one of the biggest eye-openers for many was in 2018 when the Trump Administration first locked horns with China on the global economic stage by raising tariffs on Chinese imports. The initial tariff, on some $34 billion worth of imports quickly grew as another $16 billion and two additional tariffs on $200 billion worth of imports were levied over the 12 months that followed. Of course, the Chinese counter-attacked with its own tariffs on US goods. The US labeled China a “currency manipulator” which, other than name-calling had economic implications, as well. Even broader tariffs were proposed, delayed, modified, threatened, retracted, and so on in the second half of 2019 as the two countries exchanged rhetoric and created lists of banned, or untrusted companies. Finally in January of 2020 the US and China signed the so-called Phase-One trade deal, which would slowly pull back tariffs in return for the Chinese agreeing to increase spending on US products. Though that marked the official end to the trade war, the rhetoric between the countries continued and little changed in the actual trade between nations. Ultimately, the COVID-19 pandemic took center stage, and the still-simmering trade conflict was pushed to the back burner. While there were many factors involved, the trade war with China is credited as one of the leading factors for the S&P500’s -6.24% loss in 2018, the index’s largest pullback since The Great Recession, some 10 years earlier.
As the pandemic wore on and the world emerged from its rolling lockdowns, all eyes were on the economic recovery. Strong consumer demand and a healthy stock market began to put pressure on the freshly re-animated supply chain. In many cases, that supply chain begins in China, which many have referred to as the world’s factory. Soon, companies were facing supply chain disruptions as they struggled to meet growing demand which ultimately stoked the inflation that we are still battling today. Making matters worse, fresh COVID breakouts in China led to new lockdowns under President Xi’s zero-COVID policy. Those lockdowns further gummed up supply chains ultimately reminding the world – AND INVESTORS, that China can impact US companies in a meaningful way, as the US is still highly reliant on Chines imports. Now finally, the blip on the radar.
There has been much rhetoric passed back and forth between the US and China over Taiwan. Now, I don’t have enough ink left to go through all the details of Taiwanese sovereignty but let’s just say it is quite complicated. Taiwan is the sole remaining representative of what was once the Republic of China. Confused? The China we know today is the People’s Republic of China and is not the same thing…or hasn’t been since 1949. There is lots of ambiguity. China believes that Taiwan is part of China, Taiwan disagrees, the US doesn’t disagree-ISH, depending on who and how you ask, which leads to saber rattling…lots of saber rattling – military drills off the coast, warplane flyovers - the works. One thing every party can agree on is that Taiwan is a major player on the global economic scene – it is the semiconductor capital of the world. Yeah, you know, those little chips that are in just about everything that we rely on today. When those same little chips were in short supply last year, production lines around the globe ground to a halt. Taiwan’s GDP would rank it around the 22nd largest economy in the world, somewhere around Sweden, Poland, and Belgium. Some 50% of the world’s container ships sailed through the narrow Taiwan Strait this year making it a strategically valuable region to global shipping. Rhetoric between China and US have anything but cooled down since the pandemic and the Biden Administration has done little to promote détente since taking the reins. In other words, there still exists a complex tension between the US and China. That is precisely why when House Speaker Nancy Pelosi decides to visit Taiwan, hackles go up. There are military “exercises” playing out off the shores of Taiwan and veiled military threats made by China. Though it is unlikely to result in a military conflict, we should all know well by now that an economic threat can be quite devastating as well. As of this morning a Pelosi visit to Taiwan appears imminent. That visit will certainly have implications. They will play out over the next several weeks. Add it to the already crowded radar.
WHAT’S SHAKIN’
Caterpillar Inc (CAT) shares are lower by -3.45% after it announced that it beat EPS estimates but missed Sales targets by -3.17%. The company cited a slowdown in demand, particularly from China, as it struggles with economic growth and increased lockdowns. The company is believed to derive up to 10% of its revenues from China. Dividend yield: 2.46%. Potential average analyst target upside: +14.6%.
Marriott International Inc (MAR) shares are higher by +1.88% after the company announced that it beat EPS and Revenue estimates by +14.61% and +6.30% respectively. The company has attributed its outperformance by large pent-up demand in the wake of the pandemic. Dividend yield: 0.75%. Potential average analyst target upside: +7.8%.
ALSO, this morning: Huntsman (HUN), DuPont de Nemours (DD), Zimmer Biomet (ZBH), Zebra Technologies (ZBRA), Incyte (INCY), and Cummins (CMI) all beat on EPS and Sales. Uber (UBER) beat on Sales but missed on EPS. Molson Coors (TAP) and JetBlue Airways (JBLU) came up short on earnings and revenues.
YESTERDAY’S MARKETS
Stocks fell modestly with traders repositioning yesterday as they contemplated the reality of a less aggressive Fed. The S&P500 fell by -0.28%, the Dow Jones Industrial Average slipped by -0.14%, the Nasdaq Composite Index gave up -0.18%, and the Russell 2000 Index declined by -0.10%. Bonds advanced and 10-year Treasury Note yields fell by -7 basis points to 2.57%. Cryptos dropped by -4.37% and Bitcoin declined by -2.85%.
NXT UP