Although Microsoft Corp. (MSFT) , Honeywell International Inc. (HON) and even General Electric Co. (GE) are seeing positive responses to their earnings reports this morning, the market is focused on trade wars once again.
The big news in the ongoing battle is that the Chinese have devalued the yuan, pushing the currency to its lowest level in more than a year. Just yesterday, President Trump commented that the Chinese currency "was dropping like a rock" and the strength of the dollar "put us at a disadvantage."
The logic of the move by China is obvious. It is going to increase the appeal of the goods it exports by lowering prices through devaluing the yuan. Even if tariffs are imposed on Chinese goods, they still will have some competitive price advantages.
Europe is growing increasingly concerned over the possibility of tariffs on automobiles, and President Trump said in an interview with CNBC that he is ready to put tariffs on another $500 billion of Chinese goods.
For months, the market's reaction to the trade issues has been fairly mild. There are occasional flare-ups of concern, but there is an underlying sentiment that a positive resolution will come sooner or later. It's become clear that it is more likely to be later rather than sooner, which has been causing lumpy and inconsistent action in the market.
The market has been extremely inconsistent lately, with the Dow Jones Industrial Average outperforming one day due to strength in financials and then small-caps outperforming yesterday for no obvious reason.
Earnings season so far is generally positive. The banks have done well on their reports, IBM Corp. (IBM) had a good response, Microsoft is strong this morning and even Netflix Inc. (NFLX) had a strong bounce following its disappointing subscriber growth. (Microsoft and Honeywell are holdings in Jim Cramer's Action Alerts PLUS portfolio.) There has been little talk so far about how tariffs might be impacting the economy.
There are positives and the trade wars have not had any real bite to date, but the biggest challenges are that price action is lacking a clear trend and that momentum is mixed. Traders have been complaining loudly about how trades are not developing as they would like and that there is little follow through.
Yesterday there was some decent speculative action in a variety of small-caps, but it was hard to find and there wasn't any clear sector leadership or trends. It was just some short-term movement that you had to watch vigilantly to catch.
Overall, it is a mixed market. The indices are holding up and the overall trend is still positive, but there is little upside movement. Individual stock picking has become more difficult, and if you are a trend follower it is particularly lumpy. Even the FAANG names have been more difficult lately, but Microsoft may help that group today.
My game plan is to not worry too much about the indices but keep focused on individual stocks and look for themes and sectors that are working. There isn't much, but there is always something.
