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  1. Home
  2. / Investing
  3. / Basic Materials

As Trade and Price Fears Grow, So Do Reasons for Caution

Concerns that at first were thought would be short-lived have grown into something far more pronounced and widespread.
By CHRIS VERSACE, BOB LANG AND THE AAP TEAM
Jun 26, 2018 | 12:00 PM EDT
Stocks quotes in this article: HOG, USAP

As attested to in Monday's stock market, where the four major U.S. market indices fell from 1.3% to 2.1%, trade wars and escalating tariffs increasingly are on the minds of investors. Something that at first was thought would be short-lived has grown into something far more pronounced and widespread, with tariffs potentially being exchanged among the U.S., China, the European Union, Mexico and Canada.

In Trifecta Stocks' last weekly Roundup, we stated that as we geared up for the June quarter earnings season we would be listening for companies talking about the potential impact of the tariffs on their businesses. Well, we didn't need to wait long as yesterday Harley-Davidson Inc. (HOG) shared that its motorcycle business will be whacked by President Trump's decision to impose a new 25% tariff on steel imports from the EU and a 10% tariff on imported aluminum.

For Harley-Davidson, its duty paid on imported steel and aluminum from the EU will be 31%, up from 6%. The impact is not small potatoes, considering that the EU has been Harley's second-largest market, accounting for roughly 16% of total sales last year. On an annualized basis, the company estimates the new tariffs will translate into $90 million to $100 million in incremental costs. That would be a big hit to the company's overall operating profit, as its annualized March quarter operating income was $254.3 million.

Meanwhile, Universal Stainless & Alloy Products Inc. (USAP) , a company that makes semi-finished and finished specialty steel products that include stainless steel, tool steel and aircraft-quality low-alloy steels, announced yesterday it would increase prices on all specialty and premium products by 3% to 7%. Universal Steel also said all current material and energy surcharges will remain in effect.

These two companies are setting the stage for what we're likely to hear in the coming weeks about challenges from prolonged tariffs and the need to boost prices to contend with rising input costs, which we've been tracking in the monthly economic data. In our view, this combination is likely to make for a challenging June quarter earnings season, which kicks off in just a few weeks, as costs and trade take over the spotlight from tax cuts and buybacks.

With up to $50 billion in additional tariffs being placed on Chinese goods after July 6, continued tariff retaliation by China and others could lead to a major reset of earnings expectations in the back half of 2018. Let's remember that market expectations for earnings growth were high coming into the year, and we are likely going to see those expectations reset, and yes, reset lower. We could see management teams offer "everything and the kitchen sink" commentaries should they rejigger their outlooks to factor in potential tariff implications, and their words are likely to be met with a "shoot first, ask questions later" mentality by investors. That's especially likely with the CNN Money Fear & Greed Index back in the Fear zone from Greed just a week ago.

We're not the only ones paying attention to this, as it was reported that Federal Reserve Chairman Jay Powell remarked that some business had put plans to hire or invest on hold because of trade worries and that "those concerns seem to be rising."

Investors should be vigilant with their portfolios in the coming days and be at the ready to make moves as needed.

(This commentary was originally sent to Trifecta Stocks subscribers at 8:59 a.m. ET on June 26. Click here to learn about this newsletter.)

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At the time of publication, Trifecta Stocks had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Basic Materials | Markets | Consumer | Economy | How-to | Risk Management | Commodities | Stocks

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