Jim Cramer: China's Where the Growth Is

 | May 21, 2018 | 3:50 PM EDT
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Trade pervades pretty much every aspect of corporate life for all but the most local small capitalization stocks. Today we see what happens when we get some surety that perhaps the trade fracas could work out between China and the United States.

That's how we could rally so strongly today -- the Dow going through 25,000 for the first time since March -- because, while we often think that it's really only big capitalization stocks like Caterpillar (CAT) and Boeing (BA) that are caught up in the controversy, it's much bigger than that.

So, put aside how substantive the truce might be, let's talk about why this rally makes sense.

First, we spend a ton of time talking about selling into China. But today's rally has as much to do with China selling into our market as ours selling into theirs. If China wanted to it could truly hurt the pocketbooks of all Americans, including those who could least afford it.

The most poignant example? Retail. The retail stocks have been under pressure because of fears that Chinese goods would become prohibitively expensive. We import so much from China that the prospect of China putting tariffs on our goods has caused a huge amount of fretting on the part of investors. So, when we heard of the truce, we immediately figured that the consumers are not going to suffer through a shock of much higher prices for goods.

That's how the department stores, heavily dependent on apparel that could be sourced in China managed to put on quite a show today. Classic example? Macy's (M) once again rallied, hitting a 52-week high, as prices would no longer have to be jacked up because of the tariffs. It doesn't matter if clothing prices rise because of tariffs or because of raw costs. The fact is that cheap apparel is the kind of good thing that happens because of Chinese imports.

Almost all apparel importers take some goods from China. Now it is possible, over time, for these apparel makers to switch manufacturing to other countries. But it can't be done overnight and I don't know many analysts who believed this wouldn't have a real impact on the budgets for all but the richest shoppers.

Same goes for Home Depot (HD) . Again, we don't know the exact amount of goods that are made in China and sold here under various nameplates, but Home Depot -- which reported a quarter that was considered disappointing by some (not me) -- was able to add a couple of bucks to its share price. I was surprised that Costco (COST) didn't rally more but then, again, it's been a very solid stock.

But Walmart (WMT) , Dollar Tree DT and Dollar General (DG) all gained and Chinese goods play a huge role in their low-cost business models.

Even the rails have benefited from the Chinese import trade. The biggest winner is Union Pacific (UNP) which does a gigantic business shipping Chinese goods from West coast ports to the East. Retailers in the east can't afford to truck all of that merchandise. Rail is the only economic way to go.

At a time when we worry more and more about inflation and how it might force the Fed to raise rates faster, the last thing we need are tariffs on retail goods. It's a direct bottom line hit.

So we can all breathe easier that we dodged what could have been an immediate component of inflation. I have always said that it's trade, not the 10-year yield, that's been hurting stock prices. The retail element was central to my argument about how important putting a trade dust-up on hold was to higher stock prices.

Now, let's deal with the Chinese market itself. We always think about about Boeing (BA) and how important the Chinese market is. It is certainly true that China's an important market for our planes. But I have always contended that even without China, Boeing could do quite well as there is a tremendous shortage of commercial passenger planes. We know that Caterpillar does a land office business in China, including its coal mining equipment business.

However, too me, it's the under-the-radar China touch that could have caused the most worry because, in a plodding world, China is responsible for a considerable portion of not just of the sales of these companies, but, more important, the growth of the companies' sales. If you didn't have China or if China were impeded, then the growth rates of many companies would slow dramatically and their stocks could be crushed.

For example, last year the China Daily, had a story entitled "Honeywell bets big on Growth in China." As someone who owns Honeywell (HON) shares for my charitable trust, I was incredibly worried about the lead paragraph of this story from November of last year: "Industrial conglomerate Honeywell said on Friday that China is the single largest contributor to its global growth and it was committed to expanding business in the country. The US firm's over $2.4 billion business in China has been clocking double-digit growth rates this year and accounted for 20% of its annual growth," the story said. Yikes!

Or how about United Technologies (UTX) ? I think China worries have been a huge burden on its shares because 600,000 Otis elevators are installed each year in the country. No country comes anywhere near China as a market for Otis. That would have been a huge hit to the bottom line of United Technologies' Otis division and would have led to very big number cuts.

Or consider Illinois Tool Works (ITW) . The company has 45 business units in China. The stock rallied more than three dollars.

Then there's 3M (MMM) , which has struggled of late. It has a Chinese business growing double digits, much faster than the overall growth of the company, with surgical masks being one of its best-selling products because of the terrible air quality in China. Emerson (EMR) has 40 different legal entities in China 23 of which are manufacturing facilities. Again, China's responsible for a big chunk of its growth.

Or how about Federal Express (FDX) and UPS (UPS) . These two companies have spent fortunes building out their Chinese businesses. While investors didn't necessarily expect either to be shut down. There was a possibility that the Chinese could have their planes get stuck on the tarmac while Chinese planes went ahead of them. China's gotten so important that these stocks soared, with the always volatile Fedex jumping five points and the more subdued United Parcel moving up more than a dollar.

And then, of course, there's tech. We know that Apple's (AAPL) growth depends on ever expanding Chinese sales. Now Apple manufactures a great deal of its product in China so it was always thought to be protected. But in the back of many investors' mind was the chilling thought of a boycott.

Few consumer stories are more dependent on China for growth than Starbucks SBUX, which has tried hard to refocus investors into thinking about China, has more than 3,000 stores in the country. You would think that with the U.S. having more than 13,000 stores what's the deal? But Starbucks is opening a new store in China every 15 hours.

Nike's (NKE) growth depends heavily on China as it has 8% of the almost $60 billion Chinese footwear industry. China is diaper maker Kimberly Clark's (KMB) largest growth market, too.

In each case you can see the operative term isn't the percent of business that a U.S. company does in China. That tells you very little. It's the percentage of the growth of the company that comes from China.

That's why if you believe the truce is for real, the rally is for real as I have only covered a fraction of the companies that have been dependent on Chinese growth. Does the rally have staying power? I think that it has as much staying power as the truce does. Investors will pay more for all the companies mentioned here because so much growth is dependent on the country. That's' why I don't think that this rally can be rolled back so easily. You take a trade war off the table, you put more points on the table and that's exactly what's happening today.

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