So this is what the market looks like when there's nothing in the news about our trade war with China. It's incredible how bullish the tape is when we don't have tweets that inflame tensions (even if you believe in the U.S. standing up for itself, as I do).
What's a little shocking, though, is what goes up in the absence of rhetoric. We have to shed some light on Monday's rally, but before I reveal the winners and give you some stocks to buy, let me just say that this rally is actually a continuation of Friday's move higher.
That rally was based on the robust June U.S. jobs report -- and remember what I've always preached: Nothing is more important to the stock market than the Labor Department's non-farm payroll report. When you get a bad one, it lingers like fallout after a nuclear blast. But when you get a good one, it creates a halo effect that lasts far longer than one day.
Monday's gains are a recognition that without saber-rattling on trade, we revert to what the employment numbers dictate. And right now, they're dictating that you buy the stocks of companies that are doing well -- or that are too cheap even if the trade war re-emerges as the market's dominant theme.
Now, some of this is obvious, but incredibly noteworthy, like the industrials. Here are some names that I like:
Let's start with Caterpillar (CAT) . After being such a great stock for multiple years, CAT has hit a wall that no earth mover could ever budge. Incredibly, the company proceeded after reporting a totally blow-out quarter to throw cold water on the rest of 2018 with comments on its conference call about how the great quarter might be the year's high-water mark.
CAT seemed at the time to be talking about margins coming down -- but since then, the trade war has taken on a life of its own. And now, the finest industrial is off 10% for the year and down 30 points from its high because of concerns that China -- its best growth market -- is going to go away, taking the upside with it.
I personally think CAT is still too cheap at this point to ignore. However, I prefer United Rentals (URI) -- a stock that's also down 10% for the year and off 35 points from its high but is domestic in nature and has no China exposure.
URI just last week bought BakerCorp, a tank-, pump- and filtration-rental business that dovetails perfectly with an existing rental operation that's been so successful. And while Caterpillar's stock sells at 12x earnings, URI at 10x earnings is much, much cheaper and without the China risk.
I know, the stock has run up some $5 so far on Monday, but if this benign environment continues, you could see a much bigger run. United Rentals is the direct way to play Friday's fantastic employment number, especially the rebound in construction and manufacturing. Plus, with oil this high, lots of companies are renting equipment from URI to build pipelines and bring petroleum to the market. It's what you should buy.
Next winner? Boeing (BA) .
Unlike CAT or URI, Boeing's stock is up almost 16% year to date, although it's down 30 points from its high and that's all due to China.
Now, I've said over and over that China needs Boeing more than Boeing needs China, and there's also tremendous demand from airlines all over the world for BA's planes. However, that's fallen on deaf ears, because China woes seem to blind everyone to this wondrous company.
So, just as United Rentals is a stock that's a better proxy for construction than CAT is because of the trade dispute, I suggest that you pick up some General Electric (GE) . That will get you exposure not only to a gigantic aerospace business, but also to an oil-services business at a time when oil prices are breaking out. GE also provides exposure to health-care equipment, perhaps one of the hottest sectors in the market.
Still, General Electric is down 20% for the year amid a major restructuring where it's rationalizing the business and going much more toward being an aerospace-services and engine-manufacturing company.
Finally, there's a quartet of industrials that are total China plays that haven't been able to get any traction since President Trump decided to fight back after years of our country taking it on the chin from China. These are 3M (MMM) , Emerson (EMR) , Honeywell (HON) and United Technologies (UTX) .
I think the pressure these stocks have undergone is a little extreme, but all four could give up their Monday gains if there's a single Trump tweet about any part of trade. It doesn't matter if he bashes China or merely mentions the need to defend ourselves against the Europeans by putting higher tariffs on their car exports.
That's why these four names are riskier than my other suggestions above, although my charitable trust owns all of them but United Technologies. While I'll defend them Wednesday during my monthly conference call with members of my ActionAlertsPlus.com club for investors, I recognize that Monday's action shows that China is pretty much all that matters (even if that shouldn't be true).
Now let's look at some transports, specifically Federal Express (FDX) .
I knew that Fedex was linked with China, as it worked hard to grow that business. But I was surprised to see that the stock down 6% for the year -- and, again, off 30 points from its high.
The darned thing's been clobbered by China, and nobody seems to care that the business is firing on all cylinders, as e-commerce seems to know no bounds. I think FDX is way too cheap and worth buying here.
But again, another stock is my favorite choice -- in this case, United Parcel Service (UPS) . UPS is down 9%, and it comes with a 3% dividend yield that gives you some China protection.
Then there's casino company Wynn Resorts (WYNN) . It's up four points so far Monday, but down 43 points from its high because of worries about its business in Macau, where Chinese high rollers go to gamble.
I think that this stock is way too cheap, with a decline that's way overdone. It's worth investing in given that a single positive word from Trump about U.S.-Chinese relations can send it up $20, while a negative tweet takes it down probably no more than $5. Down $5 vs. up $20 is a terrific risk/reward quotient.
Finally, I saved the best for last -- the financials, which are the big shocker of the day.
Lots of people believe that the banks have been bound by a U.S. Treasury yield curve that's not hospitable to big margins on lending. But we're learning from Monday's action that China has been weighing far more heavily on the banks than most professionals thought.
There's nothing like a big up day to find out what's really going on. Monday's rallies in Bank of America (BAC) , Citigroup (C) , Goldman Sachs (GS) , JPMorgan Chase (JPM) , Morgan Stanley (MS) and Wells Fargo (WFC) are so pronounced that we can only conclude that these got caught up in world trade.
That's right, despite the fact that volatility from the ebbs and flows of world trade are usually good for banks, Monday's action in these stocks tells you that investors see these names as levered to the global economic expansion. And that expansion is jeopardized by tariffs and trade barriers.
But once again, I beg to differ with what investors think -- particularly regarding Wells Fargo, which I expect will report an excellent quarter Friday and has virtually no international exposure. I don't think people recognize how much these companies can make in this environment, or how well they've traded post the Federal Reserve's "stress tests."
My judgment? They're all buys -- particularly Citigroup, given that it's is down an astounding 7% for the year even as it's buying back 7% of its shares outstanding.
The Bottom Line
So, now we see the truth. An absence of news on the trade-war front produces spectacular results in the industrials, aerospace, transports and amazingly, the financials.
I think all of this trade trouble has brought these stocks way too far down, and that even after Monday's rally, you should pick through rubble and get some of what have become the market's cheapest stocks.