A Red, White, And Blue Stock Market

Jul. 09, 2018 1:24 PM ETDIA, IWM, QQQ, SPY1 Like
Markos Kaminis profile picture
Markos Kaminis
13.19K Followers

Summary

  • Red is the color of the economic impact of trade war.
  • White is the color of the flag consumers will waive globally because of trade war.
  • Blue is how investors might feel as equities bear the weight of trade war worries.

On Independence Day this year, I could not help but to make an analogy about the red, white and blue of our nation’s flag, and how the stock market today displays those same “colors.” It is red because of the economic impact of a bloody trade war. It is white because consumers will waive the white flag in a trade war with no victor. It is blue because stocks have been kept from fully enjoying an opportunity for greater gains because of very relevant trade concerns.

The Red Economic Impact

The President’s efforts to attain better trade deals have thus far been met by a tit-for-tat trade scuffle between the United States and its trading partners. So-called reciprocal trade actions, with tariffs on foreign imported goods being met by counter tariffs employed by affected nations and groups of nations present a vivid illustration of an escalation toward a broader trade conflict.

Such a scenario could bring into play more lethal weapons. In other words, the somewhat limited tariffs we have seen employed thus far on select commodities and goods could expand to include broader reaching, let’s say, weapons of mass economic destruction. Perhaps the United States might tax all imports from the European Union and vice versa. Or what if China allows its currency to devalue to counter the impact of tariffs, or if China declares it is considering reducing or stopping purchases of U.S. treasuries? Today, these are only ideas of pure speculation, but tomorrow they could be reality in a bloody trade war.

Wars, and trade wars, do not start out as full on, all-out, bloody battles of entire nations and groups of nations. Rather, they begin with a spark that grows into a small fire before going out of control. Enactments of tariffs, say like the United States’ decision to tax imports of steel and aluminum, may be the first non-lethal steps toward more significant conflict.

We run the risk of a bloody mess, because our counterparts across the world may not react like we intend or expect them to, assuming we expect them to fall in line and quickly agree to trade deals that are less favorable to their peoples and more favorable to the United States. That is what we expect because of the importance of the U.S. to the global economy. Perhaps, though, they will seek to stop our current path via the use of more impactful or effective measures, like those mentioned above. A bloody mess may ensue as tit-for-tat evolves into blow-for-blow.

The White Flag of the Global Consumer

Nobody wins in war, or in trade war. Yes, there tends to be a winner on paper; but, the peoples of nations globally literally pay the price of trade war, and U.S. citizens will not be excluded. We are unnaturally raising the prices of goods and services, setting in place the fuel for a furious inflation fire. When unnaturally higher priced goods and services impede the purchases of those goods and services by a significant number of consumers, the economic impact will be unmistakable.

Furthermore, when the U.S. places tariffs on imported metals, it raises the impute price of finished goods and services using those metals. While U.S. producers of steel and aluminum may be made more competitive temporarily, and will profit from the change, every other producer of goods incorporating those metals pays the price. In turn, those producers (say of homes, autos or beer) have a choice to make: raise the price of their finished products, while hoping demand is strong enough to bear the cost; or bear the cost themselves, and see their earnings growth and expectations reduced.

There is a great potential cost to pay, as an unnecessary threat to the current economic revival is set in place to stunt growth. And if it comes, it comes just as I was expecting the economy to enter a boom period. Without the bad scenario of full fledged trade war, I saw the U.S. economy enjoying two great years of exceptional expansion. Incorporating the worst-case scenario of trade war, it could be cut short to six months. Consumers globally can only bear so much inflation, and central banks will only endure so much, despite the current solid labor and economic situation, especially in the U.S.

The Blue Stock Market

The stock market is blue because it is not maximizing its opportunity to lever exceptional economic strength. CNBC’s Rapid Update shows economists expect U.S. GDP to expand 3.9% on average in the second quarter of 2018. This follows 2.0% growth in the first quarter and 2.9% growth in the fourth quarter of 2017. The benefits of tax reform legislation, a fully employed U.S. labor market and a global economic revival are immense, but are they currently reflected by the stock market?

Following an exceptional 2017 thanks to pro-market promises by the Administration after the election, stocks started 2018 off in extraordinary fashion through January on the passage of U.S. tax reform. But, before long, trade and tariff rhetoric and actions began to weigh against equities, especially those in the S&P 500 and the Dow Jones Industrial Average. You can see in the chart of the SPDR S&P 500 (SPY) here that despite strong economic data, shares of large multinationals have gone nowhere this year, though under intensified volatility. The SPY is up just 2.5% year-to-date, while the SPDR Dow Jones (DIA) is down 0.9%. Though, the Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100, is up 10.6%, and the iShares Russell 2000 (IWM), which tracks small-cap stocks with a domestic business focus, is up 7.7%.

ChartSPY data by YCharts

While it remains unclear just how the trade tirade will develop, whether it will cause a regression of global civilization, so to speak, or lead to better deals for America and Americans, at least for now the former seems to be the case. It’s my view that if the Administration were to call a ceasefire, stocks would quickly rally to new highs.

The current P/E ratio of the S&P 500 is above its historical average, but it’s my view that earnings per share growth will also exceed historical averages and justifies a higher than average market valuation now. We can see here that the forward P/E ratio of the S&P 500 Index is 17.2X, reflecting strong forward earnings expectations that I believe are probably understated, so an elevated current P/E ratio is probably justified. And if we take away some of the blocks in the wall of worry, especially those relative to trade war concerns, I expect investors would bid stocks higher.

Conclusion

It’s a red, white and blue stock market, appropriately so I suppose through this patriotic season, because of the trade war weight against equities. While we cannot say conclusively if a worst-case scenario will play out, given our lack of insight into the complex strategy of the Administration and U.S. trading partners, and how far they are willing to go, we can say the economy, consumers and stocks are bearing, or will bear, a cost. For more of my regular coverage of markets, the economy and securities markets, readers are welcome to follow the column here at Seeking Alpha.

This article was written by

Markos Kaminis profile picture
13.19K Followers
Markos N. Kaminis generated a 23% average annual return on "Strong Buy" stock selections over 5 years while working as a Senior Equity Analyst on Wall Street. As an internal whistle-blower, I sacrificed absolutely everything to do the right thing. And despite being an eyewitness and victim of terrorism on 9-11, I am currently volunteering at a busy border crossing helping Middle Eastern & North African refugees, most displaced by war or other horrors, to land safely in Europe. Despite my life experiences, I still have hope, and believe that we must persevere with patience (forgiveness), tolerance and love. I have determined to struggle for the better good of my brethren rather than for myself, and you'll see that play out over the course of the rest of my life. But I worked far too long and hard to become an excellent stock-picker to not incorporate this work into the fold. Markos N. Kaminis generated a 23% average annual return on "Strong Buy" stock selections over 5 years and ranked 2nd among a group of 60 analysts in-house as a Senior Equity Analyst over a seven-year period at Standard & Poor's. After proving his value in-house, he was promoted into a special role as an idea generator, supporting the portfolios of institutional clients as well as driving performance within S&P's recommended lists and portfolios. At times, Markos was responsible for up to 10% of the firm's entire "Strong Buy" list and is due a great deal of credit for the group's outstanding performance during his tenure. Markos followed a group of 30-40 Small and Mid-Cap firms, and was charged with finding new buy and sell candidates across industry sectors. He generated a 23% average annual return over five years on his "Strong Buy" recommendations, and 26% over three years ended 2004. He was ranked 1st of 60 analysts in-house for his "Strong Buy" performance over 4 years (2nd over 5). Markos also authored IPO research and wrote for high-level newsletters, The Outlook, Equity Insights and Emerging Opportunities, as well as for BusinessWeek Online. He represented his firm as an analytical expert commentator for major media, including television, Internet and through quotes and interviews in reputable publications. Besides predicting the stock market correction of 2015 through a series of prescient reports here in August. (see proof here: http://seekingalpha.com/article/3482226-investor-who-predicted-the-stock-market-correction-offers-an-update ), Markos also advised investors to buy stocks at the bottom of the market in mid-February 2016 and again post-Brexit at the trough, and to buy gold in January 2016 before the commodity started its move higher. More recently, he called the pickup in the economy for 2018, the upward move for stocks in 2018, and the breakout in oil, starting in June of 2017. See: June 15, 2017 – Buy Oil Back Now; August 1, 2017 – Why Oil Prices Will Break Out – The Demand Driver; September 30, 2017 – Why Oil Prices Can Break Out Part II: Vulnerable Supply; and January 26, 2018 – Up 44% Since Our June Bullish Turn – Oil Still Supported Here. While not perfect, over the years, Markos has made countless correct market and security calls for his followers, including forecasting the demise of J.C. Penney on the heralded CEO hire's disruptive plans, the bankruptcies of Washington Mutual and Pilgrim's Pride in the $30 and $20s, respectively, as well as the purchase of Facebook in the mid-$20s when it was considered a pariah post its IPO (today it is a market darling). Markos also warned of the real estate market collapse and the financial crisis in the early days of his blogging. What I personally want you to know about my plans: After witnessing the worst of Wall Street firsthand and having the ideal vision of my childhood career choice corrupted by reality, I almost switched to full-time charity work at age 40 and still have plans for several non-profit endeavors. The future is somewhat unknown, and I am open to employment offers for portfolio management or other ideas. While continuing to publish regularly, I expect to begin work on several book ideas that I believe are important for business, for our nation and for society. I may put  my stock selection skills, earned through blood, sweat and tears, to better use, and to make my own way. I would like to give investors something rare, a dignified partner who can manage money with integrity and a clear conscience about the degree of due diligence behind investment decisions... someone who cares more about your money than your wife. I hope readers will become followers of my column here & at my blog, so that when our numbers are substantial, we might start an investment fund or two. Prior to his Wall Street career, Mr. Kaminis spent time in the back-office, as a mutual fund accountant, where he managed for a time the work of two men. Before this, from age 11 to age 25, he worked as a carpenter's apprentice and carpenter with his father, in both commercial and residential projects. Mr. Kaminis has an intimate knowledge of the real estate (undergraduate degree in Real Estate and Finance) and construction market, as well as the restaurant industry. However, as a generalist stock analyst, he showed the ability to learn any and the most complicated of industries in short time - and he gamed every challenge presented to him. Mr. Kaminis earned his MBA at the Katz Graduate School of Business at the University of Pittsburgh, and his BA at Temple University in Philadelphia. However, Markos has been studying the stock market since age 13, when he determined his career path. He made his first investment at age 16, and funded much of his undergraduate education with the proceeds of his investing success. Mr. Kaminis continues to keep busy forecasting the economic path and securities market activity. Markos is considering the eventual start-up a long/short capital appreciation hedge fund. Such a fund would limit risk through beta reduction, using a diversification strategy targeting sector & industry and long & short position inclusion. At the same time, Markos' theoretical fund would seek maximum capital appreciation through the exploitation of Mr. Kaminis' inherent economic & market discernment gift and proven stock selection skills. Mr. Kaminis also has a team of a select few analysts, technicians, strategists and economists that he has been impressed by over the years, which he expects to tap for the project when the time is right. Mr. Kaminis welcomes your interest in such a potential forward effort, and looks forward to discussing his plans with those appropriate and within legal constraints. Markos toys with very early stage entrepreneurial efforts in the testing of certain business models, all of which he intends to tie to a planned non-profit project serving the most helpless among us. The tie will be that the businesses will give employment opportunity to individuals who would otherwise have difficulty finding gainful employment. It will house and heal the homeless, ex-convicts, those completing rehabilitation efforts for drug and other addictions, and others in need of help. Markos is currently Directing the widely syndicated blog he founded, "Wall Street Greek," and is writing for other well-known publications besides advancing several big ideas. Markos' column is syndicated across sites like the Boston Globe, Kiplinger Magazine, UPI and other reputable newspaper and TV websites, as well as private networks, Amazon Kindle, iPhone and more. In the past, he has written for RealMoney.com, Motley Fool and others. Requests to research specific companies are welcome, as we serve our readers. You may contact us via this blog's contact info. Mr. Kaminis welcomes you to follow him here at Seeking Alpha, where he is proud to be a long-time contributor to this strong team of writers. He considers the Seeking Alpha team and management close friends, and for you, people worth knowing and following. Visit his site: Wall Street Greek (http://www.wallstreetgreek.blogspot.com/)
Follow

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.