What makes a China stock? All you have to do is look at what rallied big after President Donald Trump tweeted that he had a very good conversation with Chinese President Xi Jinping -- in itself a shocker these days -- and will have an extended conversation with the man who rules the Peoples Republic, when they get together next week at the G-20 meeting.
This meeting will be a very big deal, because this market is stuck here. The thesis we've been operating under is pretty simple: The trade war is slowing the economy, so therefore the Federal Reserve has no choice but to cut rates, either tomorrow or in July.
I never mind a market that's being kept afloat by what we call a Fed put, meaning that there is a net underneath stocks that will catch us, or a trampoline that will propel us if possible. It makes, sense. Ten-year interest rates are diving, housing's weakening, retail's sluggish and the transports are flagging.
That's all well and good, but that's not the explosive kind of market that can put us in much higher territory, because it's based on a bad-is-good mentality -- meaning the weaker the economy is, the more likely the fed cuts.
But if I would have my druthers, I would rather have an economy that can be strong with the low inflation that we have, and today's China burst shows exactly what I mean.
First, we know that if we put tariffs on the next $300 billion of Chinese imports, then our consumers will take a hit. We know this because retailers have been saying it forever. You could say they are talking their book, but they can't all be just trying to scare the president into relenting.
Second, we can't necessarily count on Fed Chairman Jerome Powell. He has to walk a fine line. The president keeps beating him up for raising rates in December, something that was definitely wrong.
So, we are fortunate enough to look forward now to the G-20, and that's good news for stocks, because the most visible Chinese stocks won't go anywhere with or without a rate cut. And as much as I would like to say that we don't need these Chinese stocks to go higher, I think they are the key to the next level, again, with or without a rate cut.
Now, before I go too deep into this, let me put a very serious caveat here. I doubt things will come to fruition at the G-20. I believe that President Xi called President Trump like he did before Buenos Aires in December, hoping to stop the first round of tariffs going from 10% to 25%. But then talks broke down and the tariffs increased.
The president has a big wish list. He wants to see cyber theft end, forced-tech transfers stopped, dumping suspended, state enterprises reined in, currency manipulation -- like the kind that dropped the currency 10% to try to defeat our tariffs -- halted, and no more fentanyl coming here.
I think that list is too much for Xi, and he will come hat-in-hand to beg against the next round of tariffs, and I think he will fail.
In other words, I think there is too much optimism here. There have apparently been no signs of any olive branches ahead of the meeting so far, and I don't expect any. I do expect the stock market to be hammered if nothing comes of the G-20, and I reiterate that there will most likely be nothing that occurs.
If so, here's the stocks we know could go down, right or wrong, because of the Chinese -- a list derived by me after observing today's positive action.
First: the semiconductors. Broadcom (AVGO) reported last week and said there could be a massive shortfall because of Huawei, the pirate Chinese telecom company that uses -- or at least did use -- chips by Broadcom. It's not almost back to that level before the disappointment. Micron Technology (MU) is struggling back up; commodity semis are always in demand in China; Xilinx (XLNX) , long considered to be the king of Chinese 5G technology, is back and Nvidia's (NVDA) rallying on the possibility that the Chinese will clear its purchase of Mellanox Technologies (MLNX) . Lam Research (LRCX) , which makes chip equipment, had just been downgraded; you don't want to downgrade this one if you think there will be a deal. Skyworks Solutions (SWKS) , Qorvo (QRVO) , and Western Digital (WDC) would all be lower if it weren't for this new exchange. I am calling out all of these as vulnerable, post the G-20.
Second: Apple (AAPL) . I don't want to trade Apple; I want to own it and I think the company's price-to-earning multiple is too low. That said, you have to expect that this stock gets hit if there is another set of tariffs without an exception by President Trump -- one I think is deserving, but we don't know if that could be the case.
Third: the industrials. These are very tricky. I think there are two sets of industrials that are going up: the capital-good companies that people think are dependent on China, but may already have been punished, and those that could be impacted, but have rallied enough today to make them more vulnerable.
The first? Caterpillar (CAT) and Boeing (BA) . I think this is a little nonsensical at this point. Caterpillar has become more of a service company than people realize. Boeing is all about the 737 Max. I grow less worried about these two by the day. They have real catalysts ahead and I would not sweat owning them.
But then there are the companies that need China, because it is a big percentage of their growth, namely Emerson (EMR) , 3M (MMM) and United Technologies (UTX) . The first two, I think, can miss numbers if there is no agreement. The third is involved in a difficult merger and split up and may be under a lot of pressure until the deal is finished.
One other area of optimism: FedEx's (FDX) stock has been crushed by the war. It is bouncing back. The rails, of which we have Union Pacific (UNP) on tonight, are making a comeback. That's a rough one for me if the numbers are too high.
I think that you must not be too optimistic about this group, either.
Now, I know on a day like today nobody wants to hear that I think that the talks could fail. There's tremendous optimism. But remember there is one situation no owner or investor wants to see: Tomorrow, the Fed's chief, Jay Powell, chooses to be less cautious, less vigilant about stopping a slowdown, because of a single tweet that gives hope. I expect that, ultimately, we will see the higher tariffs because the president thinks they are a big win for the nation, even if it sacrifices the profits of companies that do too much business in China.
AAPL, LRCX and NVDA are all holdings in Jim Cramer's Action Alerts PLUS member club.