Is it real? Is this new high for the S&P and Dow Jones real? Does it have staying power in light of the trade war with China?
Let me give you a qualified yes, qualified by the fact that we are always one tweet away from giving up the S&P ghost.
Earlier today the president tweeted: S&P 500 HITS AN ALL-TIME HIGH. Congratulations USA. Does that mean he wants to keep winning in the stock market? Or does that mean he can keep tussling with the Chinese to stop their dumping, their job stealing, and their bogus joint ventures that do everything from cheating on intellectual property to robbing our companies of fair profits.
Is he going to press the advantage that he seems to think he has given that we import far more from China than they take from us --about a three to one basis. That would entail reiterating that instead of 10% tariff a 25% tariff will be coming in January or even sooner.
Or is he going to wait the Chinese out, something that will let our market go still higher, barring some exogenous event that we haven't thought about?
Or maybe it doesn't matter at all because the fundamentals are that good and certain stocks are cheap enough that it's going to be the fabled win-win that any president, or any American for that matter, would want to hope for.
We all know the negatives. Our companies that sell in China will lose sales to others not from America. We will get boycotts galore of our goods. They will block any deals that they can that would be good for us, as they did with the Qualcomm (QCOM) -to buy-NXP Semi (NXPI) deal. And, most important, our tariffs will make every family in this country pay more than they currently pay for the goods from China, goods that are cheaper than we can make here, especially given that many of the industries that could have competed with them with technology here have been wiped out by the government there. That's still the operative situation that hasn't been reconciled.
But let's trace out the positive scenario so at least you know why we are rallying and why I can posit that it does have staying power.
First, it's a different bull that is snorting. It's the value bull. For most of this year, ever since the last peak in the market in January and the cratering in February, this market has been led by growth stocks. It was Facebook (FB) , until it dropped off the face of the earth with that miserable outlook, Amazon (AMZN) , Netflix (NFLX) and Alphabet (GOOGL) . In tech it was the cloud kings, the stocks that helped you get on board the cloud and save money. In health care it's been the wondrous medical device companies like Intuitive Surgical (ISRG) , Baxter (BAX) , Becton Dickenson (BDX) , Boston Scientific (BSX) and the health insurers.
Those leadership groups haven't given up the ghost. Many of the stocks are still rallying. But they aren't rallying as hard as the value stocks and that's so important because it means that the part of the market that is cheapest is now leading us. If that's the case than it is a far less dangerous situation for the bullish investors than if the old leadership is still leading the charge.
So let me give you some examples. I would say that the biggest most obvious leaders are the bank stocks. These stocks have been dead as a doornail and if you owned them as part of a diversified portfolio you kicked yourself for purchasing any bank. It's been all about fintech, the Mastercards (MA) , the Visas (V) the Squares (SQ) of the world. Don't worry, those stocks are still increasing, but they aren't rallying at the same percentage pace aCs the banks.
Case in point? JP Morgan (JPM) . Two days the stock of the biggest bank in the world was at $114. Now it's almost at $119. That's a gigantic move for this previously moribund stock. Shouldn't we be worried about such a smart jump? Not if the stock sells at 13 times next year's earnings and those earnings could be increased because interest rates are going higher, so key to the bank's future.
Not only that but it's both the short and long-term rates that are going up, the short courtesy the Fed which is expected to raise rates next week and the long, because the economy continues to bubble with the employment claims released today being the lowest since 1969. That was when inflation was raging. Now it is subdued. Nirvana.
I would be remiss if I didn't' mention Citigroup (C) which has roared from $69 to $74 off of a good outlook offered last week but it still sells at 11 times earnings and is nowhere near the $80 it traded at on January 29, the high water mark that was breached today.
Second value cohort? Of all the darned things, it's the industrials that we've lived in fear of ever since the trade war. Today's rally in that group was sparked by a Caterpillar (CAT) upgrade from Baird, a terrific research firm, which highlighted how well the company is doing away from China. It put a spot light on a group that many had been just too worried about now that we are starting to quantify exactly how badly we will all be hurt by the trade war. The stock of Cat has sold off mightily from its top of $173 from mid-January when the trade fears started. It's now at $155. Concerned? You always have to be concerned but while this stock marked time its earnings kept going higher so it now sells at 13 times next year's earnings. When you consider that the high growth stocks typically sell are more than twice that, you are still getting a bargain even if China balks at buying their wares.
Now I am not denying that things are getting hotter and hotter with China. But we did hear from Jamie Dimon, the head of JPMorgan, last night in an exclusive interview with CNBC that he thinks, and I quote, "it's not a trade war . I call it a skirmish." He also put it in this perspective: "but if you look at tariffs on $200 billion, ok, so just make believe it all got passed on to American consumers, they have to pay another $20 billion, something like that. It's a $20 trillion economy. So the actual economic effect is not that dramatic." If that's the case then I think we have the upper hand because we would be hurt far less than the Chinese and that might make them more likely to buy Caterpillar's engines and mining equipment, not less so.
Okay, look it's not all bullish. Today the retailers got slaughtered. What's that all about? I think it is a belief that the retailers will have to eat the tariffs, meaning they can't pass on all of the price increases. Not only that, but Amazon (AMZN) , which has become a powerful merchant of its own goods, can always undercut any company that makes goods in China and sells them here. This morning I saw an advertisement for a piece of luggage from Amazon that seemed identical to one from Samsonite (SMSEY) a company that has told retailers it has to raise prices. When I comparison shopped Amazon was already half the price for what looks to be a similar piece of luggage from Samsonite.
So a combination of low pricing by the Death Star, the old name from Amazon, and higher prices at the retail level could very well man that the department stores can't make their numbers. So their stocks were shelled. Makes sense.
Plus, let's do some back of then envelope thinking. It the president ends up taking tariffs to 25% and all the current manufacturers keep making things in China and all of the tariffs are passed through it comes to about $1000 a family. Not ideal. But given that the average family got a $1,600 tax cut, the consumer is still money good. And it's highly unlikely that the tariffs will all fall on the heads of the consumers or the retail stocks wouldn't be such a mess today.
Ultimately, it may just be one big rotation out of growth into value, that encompasses selling the expensive stocks and putting that money into stocks that sell at a big discount to the average stock in the S&P. That's a far more sustainable rally than the other way around. So if we can just tamp the speculative stocks - like the cannabis craziness - and boost the value plays, it's could be built to last.
