Did we fret for nothing? No, no, no. I have heard a lot of people in the last few weeks who say, "Trade war, uh, what is it good for, absolutely nothing." But the truth is that stock traders have a very hard time trying to figure out who will be hurt and who will really be hurt, and that's why we can rally Tuesday.
Let me explain.
First, there is no doubt that slowing down trade with China doesn't make our economy grow faster, at least not initially, although we are not seeing nearly as many companies be hurt as economists and pundits told us would be dinged.
Sure, farmers get hurt but we inevitably subsidize farmers because their needs are regarded as imperative so, in the end, they aren't nearly as imperiled as we first may think. That's a combination of Jeffersonianism and bipartisan love from smaller states that each have two senators and one key state that starts primary season.
The Chinese, somehow, don't seem to understand that. They can slap tariffs on all sorts of condiments and Congress will pay farmers for their losses. That's the American way. How can they not be more savvy? But then again they are going to put a tariff on American tequila so who knows how close they really are to the situation. If this is their 200-year domination plan they aren't really calling in the big guns.
Actually, far more worrisome for the world's economy, is the Chinese slowdown that we are going to cause. The Chinese, basking in this 200-year thing, seem to have no concept of how much they will be hurt if President Trump puts tariffs on the rest of our imports. Never forget that the Soviets -- another Communist dictatorship, albeit less of a capitalist one -- had a real long view but it didn't survive because its economy collapsed. I would say the Chinese Communist economy will collapse a lot sooner than ours, although, somehow, that's taboo to even utter.
The problem is we don't want China to collapse. It is the second largest economy and therefore an important engine of growth.
That's why Monday we spent all day talking about Smoot-Hawley and the coming world depression caused by Trump.
Tuesday, not so much. Tuesday we rethought the whole megillah. We decided that perhaps we should only punish companies that are actually going to be hurt. We embraced logic and proportion, which Jefferson Airplane like, had fallen sloppy dead just the day before.
Tuesday we recognized, for example, that the cloud kings, which do virtually no business in China won't be hurt much at all. So Adobe (ADBE) , Workday (WDAY) , ServiceNow (NOW) , Splunk (SPLK) , VMWare (VMW) , and newly crowned king Twilio (TWLO) , won't even be nicked. Adobe's big in China, for sure, but the company actually can't do all that much business there because of piracy. Well speak of the devil!
Now, traders aren't totally oblivious. On a big down day the companies that are going to be hurt the most really do get clobbered. The corollary is true, too.
Ralph Lauren (RL) , the apparel company, reported a terrific quarter but the CEO, Parice Louvet, mentioned that the company sources some sweaters and footwear from the People's Republic. That admission sent his stock tumbling. The stock of Macy's (M) , which reports Wednesday, couldn't get much traction, perhaps because of the tariffs. Walmart (WMT) , which is engaged in a great civil war with Amazon (AMZN) , barely budged.
And then there is Apple (AAPL) . While many a soul now seems to want to get on board the tariff train, you have to recognize that some of our companies have worked mightily to win over the Chinese and make a lot of money that ends up with U.S. shareholders. Should Apple be punished because they make parts in China and because 2.5 million developers reside there? It is a quandary. I suspect that if Apple were to announce more jobs in the U.S. it could help, but it already supports 2 million developers here and spends $60 billion here with 9,000 different companies supporting another 450,000 jobs, up ten percent from last year. Apple has also committed to spend $5 billion on U.S. manufacturing.
If I were both countries I would make Apple Switzerland and let it do what it wants. Maybe Tim Cook needs to buy up farmland? I mean really, how can this company really be in the crosshairs? I guess Nike (NKE) and Starbucks (SBUX) are OK because the Chinese haven't yet figured out how to make a Jordan and Chinese coffee may not have all that much cache. Starbucks, again, employs a huge number of people in China, and its stock has barely been dinged.
It's easy to see why. As CEO Kevin Johnson told me "Starbucks just celebrated our 20th anniversary in China. We built Starbucks "in China for China" and, he pointed out, the company employs 50,000 people in the country. They know how to talk the talk and play they long game. They have 3,800 stores in China which Johnson says "were designed and built in partnership with local Chinese artisans and contractors."
That seems to have, deservedly, immunized them.
Apple can't seem to buy immunization to save its life.
The Apple crosshairs seem unfair, don't they?
Now, I want to be careful to point out that the selloff may not be totally over. We are oversold, which is a nice springboard. And it does seem like there is an intermission in the trade war. The problem is that President Trump is so determined to get everyone to buy outside of China that it's become a foot race that not everyone can win. Those that are too linked will find their stocks getting hammered again on the next down day.
The good news, though, is that typically on day three of a selloff you only get a smattering of brave souls coming in at the end of the day to do some buying. It's usually concentrated in a few stocks with no exposure whatsoever to China.
Tuesday was much more broad, which is far more bullish than many thought possible. Boeing (BA) , for example, saw its stock rally as did Caterpillar (CAT) , although both were very oversold. They probably can go up a bit more but I would be wary of the former because of headline 737 MAX risk and I would be cautious on the latter because Deere DE reports Friday and the overlapping portion of Caterpillar may be ugly.
Perhaps even more bullish, Uber's (UBER) stock went up Tuesday. I don't even know what to say about that. I will leave it to others, including the people who paid up ten bucks for that delectable Michelin-style Burger from Beyond Meat (BYND) .
Still, the main thing you have to take away from Tuesday is because there are so many ETFs that link to each other, because there are so many companies with stocks that shouldn't be hit that are combined with those that are, you get this mosh pit of stocks that don't get separated in one session or even a second session. It's too difficult. But, on day three, wonders to behold, the winners and the not-so winners are in evidence and, as I told you would happen, the sellers forget why they sold and the buyers remember why they like stocks and everything comes together in a surprisingly positive fashion.
Can it stay this way? We have a gauntlet of retailers reporting and they could all be like Ralph Lauren. But the fact is traders take their cue from the nuttiest things. Without some sort of new trash-talking tweet from the president saying the talks are off, or the Chinese coming back with something that knocks our economy back more than taxing the three T's: Tito's Vodka, trout and American-made tequila (hmmm, did we annex Jalisco? Darn, no one told me), then what you see today is what you get.