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Capital 19 Catch-Up – Jun 4

May was a tough one for investors in 2019 with the major indices all suffering their first monthly losses for the year. The benchmark S&P500 fell a hefty 6.6% for the month, while the Dow lost 6.7%, in what was their steepest may decline since 2010 (and second worst May decline since the 1960s). The Nasdaq, heavily laden with technology stocks, fell the most, losing 7.9% for the month.

Donald Trump’s Tweets target China and Mexico

So who or what was the culprit in the markets worst month since December of last year? Well, it was Twitter (TWTR). No, not the stock itself, although it did lose just shy of 10% in May. Specifically, it was Donald Trump’s twitter account, which was at its imposing best from the start of the month, right up to its very end. It began on May 5 with a series of tweets blaming China for reneging on certain agreements in its trade negotiations and threatening to increase tariffs on $200 billion worth of Chinese goods back to their original 25% – which was shortly enacted a few days later on May 10. China then retaliated with $60 billion worth of tariff increases of their own. Then, again on Twitter, Trump announced they were banning Huawei and other Chinese companies from doing business with US companies.

China retaliated this time with a veiled threat to ban exports on rare-earth materials to the US. These are vital materials in US sectors such as oil refining and the electronics industry and would have a massively detrimental effect on the US economy – if China is bold enough to carry through with the threat. I doubt they will want to poke the bear any further though. As we have said previously, China has a lot more to lose in this trade battle.

Trump must be enjoying the trade battle so far because on Thursday evening he was back on Twitter again, this time threatening Mexico with tariff increases. Rather than being for trade-related offences, however, this time it was in regards to immigration issues between the two major trading partners. Trump wants refugees to stop coming over the Mexican border.

While I’m all for the trade battle with China – even though it’s hurting my stock portfolio at the present time, I think in the long run the US needed to take a stand. It may hurt the economy initially, but with a potential payoff down the track. With the Mexico issue, it’s going to hurt the economy with no economic payoff – and I’ll leave it up to you to decide whether there’s a humanitarian payoff at all.

 

Impact on Mexico and Car Manufacturers

Tariffs will initially begin at 5% on May 10 but then increase to 25% if Mexico does not comply with demands. They send 80% of their exports to the US so you would imagine they would be panicking right now, even though in reality, it’s the US companies that pay the tariffs, and eventually the US consumer. However, it will make Mexican products less enticing in the long run which would have a devastating effect on their economy. Unlike China, who have the muscle to handle a fight, I can see Mexico caving in pretty quickly here.

That will be good news for the car makers who copped a battering last Friday. Most of the vehicles imported into the US come from Mexico. It’s an industry which will be one of the hardest hit if we see an increase to 25%. Can you imagine a member of the public paying 25% more for a car? I think not. General Motors (GM) lost 4.25% the session following Trump’s tweet, While Fiat Chrysler (FCAU) fell 5.82% and Ford (F) dropped 2.26%.

 

Tech Stocks

Technology stocks were hit hardest in May. The majority of them have a large footprint in China, whether it be a large customer base, suppliers, or their own manufacturing centres. The Huawei ban also played a role in the selloff. Apple (AAPL) lost 12% for the month, while Google (GOOGL) lost just over 6%, and Amazon (AMZN) was down just shy of 10%. And it was worse news for the chipmakers who have most of their supply chains in China.

Nvidia (NVDA) fared worst losing 25.2% in May and taking its share price back to where it started the year, almost back to where it fell in those late December falls. It’s a good buy back at these levels but you may want to wait a touch longer before jumping back in. Others to suffer included Skyworks (SWKS) who fell 24.4%, Micron Technology (MU) who fell 22.5%, while Qualcomm (QCOM) dropped 22.4%. The VanEck Semiconductor ETF (SMH) lost 15.5% overall.

The losses weren’t just confined to the tech sector of course. Of the S&P500’s eleven group segments only one managed a positive May – the real estate sector which gained 0.9%. And that was only because interest rate yields were plummeting, taking us to another inverted yield curve. Energy stocks were actually the worst performing sector, losing 11.7% on average as the trade war fears bit hard and oil prices fell. At the top end we had Utilities down only 1.3%, and healthcare lower by only 2.5%. Nice stocks to have in your portfolio after a volatile month.

 

VIX Levels

We also saw the VIX hit levels we hadn’t seen since the turmoil in November. We need to remember however, that the economy is still running strongly, unemployment is at record lows, and earnings out of the last quarter were well ahead of expectations.

Falls of more than 5% happen regularly. They’ve occurred in 65 out of the last 70 years in fact. A deal with Mexico over the next week will calm some fears, and the G20 summit at the end of June in Osaka will be a good chance for the US and China to hash out some sort of plea deal that will hopefully see an easing in tariff levels.

 

Earnings News

In earnings news, we saw clothing retailer Abercrombie & Fitch struggle last Wednesday as sales and guidance missed expectations. International sales were hit hard, and worries of imports from China saw the share price fall a hefty 26% after their announcement.

In the coming week, we’ll see a few stragglers releasing the first quarter earnings results, as well as a few cheeky ones getting in early for the second quarter. Tiffany & Co (TIF) will be out on Tuesday, and chipmaker Broadcom (AVGO) will try and buck the trend for the semiconductor sector.

Personally, I’ll be looking out for the Nathan’s Famous (NATH) result on Friday. The purveyor of fine hotdogs will be out to resurrect an ordinary 2019 to date, following on from a horror six month run at the end of 2018. What started as a 5c hotdog stand on Coney Island in 1916 is now the most famous hotdog brand in the world – although they’ve only just hit our shores here in Australia. And they’re looking to expand worldwide.

What I most like at the moment is that the share price is as cheap as its been in two years. This is despite earnings being strong and the introduction of a dividend at the start of this year. The P/E is sitting at just under 15, and if Friday’s earnings and guidance is strong it could be set up for a great next twelve months.

There are some big data announcements this week including ISM manufacturing PMI overnight, and the non-farm payroll and unemployment numbers for May on Friday. Donald Trump will be in the UK which will no doubt cause headlines, especially with Theresa May stepping down on Friday. And at the end of the week finance ministers and central bankers from the G20 nations will meet in Japan for meetings. It will be interesting to see if we can get any trade negotiations happening while they’re all together.

Please take a look below for a wider list of earnings and economic data.

Have a great week everybody. And Go the Blues on Wednesday night!!

 

Earnings:

  • Tuesday: G-III Apparel (GIII), Tiffany & Co (TIF)
  • Wednesday: Campbell Soup (CPB), Five Below (FIVE)
  • Thursday: Broadcom (AVGO), FuelCell Energy (FCEL), Guess? Inc (GES), Vail Resorts (MTN)
  • Friday: Nathan’s Famous (NATH)

Economic Data:

  • Tuesday: Fed Policy conference, Factory orders
  • Wednesday: ADP employment, Markit Services PMI, ISM non-manufacturing index, Beige Book
  • Thursday: Weekly jobless claims, Trade deficit, Productivity revision, Unit labor costs revision
  • Friday: Nonfarm payrolls, Unemployment rate, Average hourly earnings, Wholesale inventories, Consumer credit

 


 

 

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