The broad market might be at an inflection point. If so, here’s the way to reposition your portfolio
Bull markets don’t die of old age … but they might die of a crippling economic choke-hold.
As you know, trade discussions with China fell apart in May, and the ripple effects shook markets. The S&P fell 6.5% — it’s worst monthly performance of the year. The Dow has posted six straight weekly losses, the worst stretch since 2011. Global bellwethers Amazon and Apple — two companies that reflect the impact of the trade war with China — fell 14.7% and 7%, respectively, last month. Meanwhile, the 10-year yield declined to 2.15% in May from 2.5% at the beginning of the month.
And if that’s not bad enough, the trade war has now expanded. Add Mexico and India to Trump’s tariff list (and Australia might be next).
But before we go full “gloom and doom,” let’s take a breath. It’s easy to get caught up in headlines and hype from the financial pundits. But that’s not the right way to manage your money.
The reality is that even within tougher markets, there are often pockets of bullishness — and we saw one such example in May. This outperformance illustrates the power of a specific type of investing, which we’ll talk about later in this issue.
But let’s start with a deeper dive into the tariffs and their impact on the U.S. economy. There are red flags waving at the moment.
Then, we’ll look at one way you can pivot your portfolio to help protect your money, regardless of whether this bull keeps going.
***How the expanding trade war could hurt our economy and the stock market
Let’s outline the basic premise …
The fear is that all of these new tariffs will have the practical effect of increasing prices on goods all around the globe … Increased costs will decrease sales… Fewer sales will stunt economic growth … That will lead to reduced corporate earnings … which eventually means lower stock prices … which hurts you and me.
Though tariffs may afford some short-term protection for domestic industries, they do so at the expense of others in the economy. Namely, consumers and other, related industries. The result is often 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.
Last week, Liberty Street Economics explained the costs associated with Chinese tariffs:
U.S. purchasers of imports from China must now pay the import tax in addition to the base price. Thus, if a firm (or consumer) is importing goods for $100 a unit from China, a 10% tariff will cause the domestic price to rise to $110 per unit … it is not a true cost for the U.S. economy because the money is simply transferred from buyers of imports to government coffers and thus could, in principle, be rebated.
But a different type of cost occurs when a company chooses not to pay tariffs, and instead finds a new supplier somewhere else. They might choose to pay a Korean firm $109 for a product rather than pay a Chinese firm $110 ($100 plus a 10% tariff). Here, the consumer pays a higher price — yet there is no tariff revenue that could be rebated by a government. The name for this is deadweight loss.
Adding everything up, Liberty Street Economics estimated that the cost to the average U.S. household of 2018’s Chinese tariffs was $419 a year ($132 in deadweight loss). Our current tariffs are expected to cost $831 a year ($620 in deadweight loss). Translation — not good.
***And now we can add Mexico and India to the list … and Australia might be coming
Unless Mexico takes actions that Trump deems effective in stemming illegal immigration into the U.S., Trump is threatening to place 5% tariffs on all Mexican imports starting June 10th. These tariffs would increase each month until reaching 25% in October.
Trump hit India as well, removing it from the U.S.’s privileged-trading program called the Generalized System of Preferences. The move may add as much as 7% tariffs on Indian exports of goods like chemicals, auto parts and tableware to the U.S. Reports indicate both Mexico and India are considering retaliatory tariffs. As you now know, all of these tariffs really reduce to one thing — you and I pay more for the stuff we want.
But let’s make this more relatable …
Jesus Seade, Mexico’s deputy foreign minister, explained the economic fallout of tariffs by pointing toward the auto parts industry. Given the integration of supply chains, some auto parts cross the U.S./Mexico border as many as eight times before a vehicle is finally assembled (four times from Mexico into the U.S.). With a 5% tariff on each entry from Mexico, that’s a price hike of 20% — which will come out of the pockets of consumers.
***How is all of this affecting the forecast for the U.S. economy? Morgan Stanley just sounded the alarm
According to a new report from Morgan Stanley which was sent to clients late Sunday, the U.S. market cycle has shifted from an expansionary phase to a “downturn” for the first time since 2007.
The report claimed the decline of this cyclical indicator adds to “a litany of downside risks we see for the markets.” It went on to caution that a “phase-change” in this gauge has typically pointed to “higher chances of recession or a bear market.”
Morgan Stanley strategists say it often takes several months for a downturn to materialize after the cyclical measure turns negative.
***Now, while it’s important to note all of these red flags, there are still gains to be had in certain corners of the market
First, here’s the S&P from May …
Bad right? If you were a broad market investor, you felt the pain.
But if you were invested in Crown Castle, you had a very different May, as you can see below.
It was an even better month if you were in American Tower Corp.
Crown Castle and American Tower are both companies that operate in the telecom/5G space. As you know, 5G is the technology that’s powering the communications revolution that’s going to redefine our world in just a few short years.
Stepping back, “5G” belongs in a different bucket than the S&P — a much narrower bucket. You see, 5G is a “theme” and investors who want to bet alongside this theme are “thematic” investors.
Beyond 5G, there are several other major themes in the investment markets today — legalized marijuana, autonomous vehicles, next generation batteries, and concierge medicine, just to name a few.
***The benefit of becoming a thematic investor is it enables you to break away from broad market performance
In other words, instead of being beholden to the S&P’s chart above, you could have instead seen your money rise with CCI or AMT.
Now, don’t get me wrong — being a broad market investor can be fantastic, as the last 10 years illustrates. But if we’re truly at an inflection point … if tariffs and trade wars mean the easy money is behind is … then smart investors need to change their orientation. A broad market mentality would no longer apply. We’ll need a sniper approach, rather than a shotgun approach.
Fortunately, the thematic trends just mentioned are going to be huge (and already are huge in some cases — just look at marijuana). They’re going to create literally trillions of dollars’ worth of investment wealth over the coming years. So, in one sense, it doesn’t matter as much what happens in the broad market because that’s not where we’ll be invested. While money is funneling out of all the average, ho-hum stocks that make up the broad market, stocks relating to these major themes will be powering ahead.
For example, famed investor, Louis Navellier is a big believer in 5G as a massive wealth generator. Here’s what he recently wrote to subscribers:
5G is spreading like wildfire. Remember, this technology is a big deal, as it brings cable, modem and internet speeds to the air. In other words, you will not need a cable modem to download and stream movies in four to five years. That’s an incredible development, and it’s going to be huge for many technology companies.
The global 5G infrastructure market is expected to grow from $2.55 billion in 2020 to over $42 billion by 2025 — a 75.1% increase in just one market.
And remember, because 5G plays a big role in industries like the Internet of Things and self-driving cars, this company will have an even bigger sandbox to play in.
Do you have exposure to themes like 5G?
Your portfolio might have been perfectly-positioned for the last 10 years. But is it perfect for the next 10?
If you don’t know where to start as a thematic investor, 5G with Louis is a good one. He’s put together a report for subscribers called The #1 Investment for the Coming 5G Revolution, which gives details on 5G and the best way for investors to play it. Click here for more.
We’ll continue to keep you updated on tariffs, thematic investing, and 5G here in the Digest.
Have a good evening,