Trump’s tweets set off a 450-point sell-off. What to do with your portfolio

Yesterday, the Dow tanked 471 points … but in a stunning turnaround, was able to rally, finishing the day down just 66 points. But as I write Tuesday morning, the market is rattled again, down more than 300 points.

Behind the sell-off were two tweets from President Trump from Sunday afternoon. In an unexpected about-face, Trump threatened to raise Chinese tariffs from 10% up to 25% on roughly $200 billion of goods.

While widespread expectation was that an accord could be reached by this Friday, Trump’s tweets have suddenly jeopardized that possibility. In fact, as of Tuesday morning, top U.S. trade officials indicate that higher tariffs on Chinese goods are coming later this week.

The reason behind the abrupt change?

Apparently, Trump’s top trade negotiator indicated that Beijing was back-tracking on a trade-deal following last week’s talks. The specific point of contention relates to Chinese law. Whereas Chinese negotiators had previously agreed to change laws to accommodate negotiation deal-points, they reversed their stance last week, no longer agreeing to any deal requiring a change to Chinese law.

***The root of this dispute relates to intellectual property

As of now, China requires U.S. companies looking to do business in China to reveal proprietary technologies, as well as other intellectual property. Robert Lighthizer, the top U.S. representative, had felt this issue had previously been resolved so that it would no longer be a requirement. So, the sudden reversal signaled an attempted renegotiation which angered Lighthizer, and then angered Trump himself. The fiery Presidential tweets resulted.

News reports indicate that confidential sources familiar with the intricacies of the negotiations revealed that the tone of last week’s round of talks, which had been described as productive in the mainstream media, was actually overstated.

***The violent sell-off reveals that a resolution to the Chinese trade war has largely been priced into the market … which is a dangerous assumption

In prior Digests, we’ve discussed how earnings strength drives stock prices in the long-term, in the short-term, it’s surprises to earnings expectations that move prices.

In this case, though we’re not dealing with earnings, the same principle of surprise applies. The latest hiccup with trade negotiations, as evidenced through Trump’s tweet, was unexpected. If you look back over the past several weeks of headlines, they’re mostly positive, suggesting that we’re finally nearing a deal.

It’s apparent now that this optimism has made its way into market prices, pushing them higher. So, this sudden surprise shatters that rose-tinted assumption, forcing markets to find a new equilibrium that reflects an uncertain trade-resolution.

While the Dow Jones was able to climb back from being down more 450 points, the tweets did far more damage in China. The Shanghai Composite Index tanked 5.6%, while its counterpart in Shenzhen shed 7.4% — their steepest drop in three years.

Early reports from yesterday indicated that Chinese officials were considering cancelling the trade talks that were set to resume tomorrow. However, as the day went on, we learned that a Chinese delegation will still travel to the U.S. to continue negotiations.

***So, what’s the real fear that’s leading to the market sell-off?

Stunted economic growth leading to reduced earnings.

Just to make sure we’re all on the same page, let me briefly establish some background on tariffs. From the Tax Foundation:

Tariffs are a type of excise tax that is levied on goods produced abroad at the time of import. They are intended to increase consumption of goods manufactured at home by increasing the price of foreign-produced goods.

Though tariffs may afford some short-term protection for domestic industries by shielding them from foreign competitors, they do so at the expense of others in the economy, including consumers and other industries, resulting in less economic output on net.

So, while tariffs might be effective as a negotiation tool, they can have a negative impact on the consumers of the country which initiated the tariffs, and the broader economy. As a representative of Apple wrote to the U.S. government this past September, “All tariffs ultimately show up as a tax on U.S. consumers.” If we follow that thread, higher taxes increase the out-of-pocket cost of goods for consumers … and as prices climb, consumer demand falls … falling demand leads to reduced corporate earnings … which leads to declining stock prices.

From The Wall Street Journal:

“Taxing Americans when they buy furniture, tools, electronics and groceries should have nothing to do with reaching this agreement,” said a statement from Tariffs Hurt the Heartland, a coalition of U.S. trade associations. “This isn’t leverage to get a better deal, it’s taking money out of the pockets of hardworking Americans.”

Rick Helfenbein, president of the American Apparel and Footwear Association, said more tariffs would “add additional obstacles to economic growth.” His group estimated that raising tariffs on apparel imports to 25% would raise costs for a family of four by about $500 a year.

***So, what does this mean for your portfolio?

It underscores the importance of filling your portfolio with quality companies that can thrive in a narrower earnings environment. This is exactly what Louis Navellier has been saying for months.

Louis is a true market legend, and the editor of Accelerated Profits. His focus is those select companies offering remarkable earnings growth, leading to shorter-term stock price outperformance. Here’s how Louis recently described our current market environment:

Yes, we’re facing a slowing earnings environment, mainly due to more difficult year-over-year comparisons and the strong U.S. dollar. According to FactSet, the S&P 500’s first-quarter earnings are now forecast to decline 3.9% year-over-year. That’s the biggest year-over-year decline in earnings since the second quarter of 2016. And looking ahead, second-quarter earnings are expected to decline slightly, and third-quarter earnings are anticipated to post low single-digit growth.

Clearly, earnings momentum has tapped the brakes. In this environment, the “smart money” and institutional buyers will grow increasingly selective and chase fewer stocks in the upcoming months. So, the key to success during the bumpy summer months will be a laser focus on stocks with superior earnings and sales growth.

The irony is that if trade negotiations continue to sour, leading to a tougher earnings environment, it could actually help the type of stocks Louis recommends. That’s because with fewer companies performing well in a challenging environment, investors will rotate into the type of superior-earnings stocks Louis has recommended, driving up prices.

***And in fact, that’s what we’ve already seen with Louis’ picks

So far this earnings season, Louis’ Ultimate Growth Trades companies are posting solid earnings surprises. Last week, Louis had 13 of his companies release results — a full 10 of them beat analysts’ estimates. As to the 12 more companies that are reporting this week, Louis tells us:

… I’m expecting the wave-after-wave of positive earnings surprises to continue.

We’ll continue to keep you up to date as to how the trade negotiations are unfolding. In the meantime, how is your portfolio positioned to handle a tougher earnings environment?

If you’re unsure, make some time to look into it today. And if you’re interested in more from Louis as to how to find winning stocks in this environment, click here to learn more — he even gives away the name of his favorite stock for new dollars today.

Have a good evening,

Jeff Remsburg