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Feb. 14, 2019, 10:40 a.m. EST

Bullish investors ‘too sanguine’ about U.S.-China trade talks, warns fund manager

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By Barbara Kollmeyer, MarketWatch


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Rev on the red line?

After nearly a week of trade-talk booya, they’re finally getting down to business in Beijing.

And POTUS’s market-pleasing deadline squashiness may hinge a lot on how the next couple of days go between China Vice Premier Liu He, U.S. Trade Rep. Lighthizer and Treasury Secretary Steven Mnuchin:

No pressure guys, but investors seem to have a lot riding on the trade-optimism. We’ve seen fresh highs 2019 for Wall Street, and the S&P 500 bust above its 200-day moving average and the Nasdaq on the cusp of breaking out of bear-market territory as cheery trade headlines float past.

Trouble on the horizon? Cracked Market’s contrarian Jani Ziedins notes the S&P is fast approaching the upper end of the well-established 2,600 to 2,800 trading range. “Even under ideal conditions, we would expect the market to pause here. And if the headlines are less than good, that pause could easily turn into waves of profit-taking,” he said.

Onto our call of the day , from Ronald Temple, head of U.S. equity and co-head of multiasset at Lazard Asset Management , who worries investors are “too sanguine” about trade, as he flags another fast-approaching and overlooked deadline for negotiators.

“The upcoming Section 232 report related to autos and auto parts is not as well-known as it should be. Among the people who are aware of the report, it appears that the consensus is that the report and the consequences thereof will be a non-event,” Temple said in a recent interview with MarketWatch.

In a nutshell, POTUS directed the Commerce Department last May to investigate whether to impose 25% tariffs on imported autos and auto parts, and the deadline is fast approaching — Sunday, Feb. 17.

In the front line of the trade wars, the auto sector /zigman2/quotes/210600331/delayed XX:SP500.2510 -0.40%  is nowhere near highs of last summer and further away from January 2018 highs, though it is up a respectable 15% so far this year. Ford /zigman2/quotes/208911460/composite F -0.11%  and GM /zigman2/quotes/205226835/composite GM -0.45%  are also up, though Tesla /zigman2/quotes/203558040/composite TSLA +1.08%  has had a tougher time. In short, a ruling to lay down the full 25% of tariffs would “batter the industry,” said Karl Brauer, executive publisher of Cox Automotive, in emailed comments.

“Total new cars sales could drop 2 million units, or more than 10%, and the average vehicle price could increase more than $4,400, or approximately 12%,” he said, adding that for imported cars, prices would rise closer to $7,000, but then even domestic cars could see over $2,200 added just because of higher costs for imported parts. And then job cuts would hit dealers, supplier and manufacturers.

“For these reasons it’s unlikely the administration and congress will implement these tariffs, though it’s impossible to know for certain,” Brauer adds.

Lazard’s Temple says investors should get used trade tensions persisting “for years to come with periodic flare ups followed by temporary respites.”

And they should steel themselves and stay invested these days, as the market will likely shift from trade to Fed worries by midyear, he says.

“Given macro risks, policy risks this is really a good time for people to drill down on individual security level and focus on what they own,” said Temple, whose firm seeks out so-called compounders — companies that have the ability to sustain returns better than their peer group and have the highest returns on capital across the market.

“Over time they can compound earnings growth book value capital because they have good competitive advantages,” and tend to outperform when the market goes wrong, he says. Do your homework and you’ll find them in tech, health care, the consumer space and even industrials, said Temple.

Read: Why stocks have gone from record-low correlation to extreme highs since October

The market

The Dow /zigman2/quotes/210598065/realtime DJIA -0.38% , S&P 500 /zigman2/quotes/210599714/realtime SPX -0.32%  and Nasdaq /zigman2/quotes/210598365/realtime COMP -0.40% indexes are all moving lower in early action. The dollar /zigman2/quotes/210598269/delayed DXY -0.06% is flat, gold is down and crude is higher.

Europe stocks /zigman2/quotes/210599654/delayed XX:SXXP -0.24%  were mostly up, and Asia paused for breath, outside of a 1.1% gain for the Kospi /zigman2/quotes/210598069/delayed KR:180721 +0.33% .

The chart

In 2015, billionaire hedge-fund manager Ray Dalio spoke of eerie similarities between economic events in the 1930s and current ones, warning of a potentially “significant selloff in risk assets.” “The combination of these monetary and fiscal tightening pressures created a significant selloff in risk assets,” Dalio wrote.

Providing a then-and-now chart of the S&P 500, Jesse Felder of the popular Felder Report blog picked up on that analog last summer and found close tracking for the analog. Here’s that chart:

And here’s our chart of the day, where Felder updated the above and it’s no less unsettling:

/zigman2/quotes/210600331/delayed
add Add to watchlist XX:SP500-2510
XX : S&P US
115.95
-0.47 -0.40%
Volume: 31.39M
Dec. 9, 2019 9:20p
loading...
/zigman2/quotes/208911460/composite
US : U.S.: NYSE
$ 9.01
-0.01 -0.11%
Volume: 21.55M
Dec. 9, 2019 4:10p
P/E Ratio
21.90
Dividend Yield
6.66%
Market Cap
$35.76 billion
Rev. per Employee
$805,719
loading...
/zigman2/quotes/205226835/composite
US : U.S.: NYSE
$ 35.38
-0.16 -0.45%
Volume: 6.81M
Dec. 9, 2019 4:10p
P/E Ratio
5.77
Dividend Yield
4.30%
Market Cap
$50.78 billion
Rev. per Employee
$849,994
loading...
/zigman2/quotes/203558040/composite
US : U.S.: Nasdaq
$ 339.53
+3.64 +1.08%
Volume: 8.79M
Dec. 9, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$60.54 billion
Rev. per Employee
$439,627
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,909.60
-105.46 -0.38%
Volume: 217.00M
Dec. 9, 2019 4:20p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,135.96
-9.95 -0.32%
Volume: 1.57B
Dec. 9, 2019 4:20p
loading...
/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
8,621.83
-34.70 -0.40%
Volume: 1.93M
Dec. 9, 2019 4:50p
loading...
/zigman2/quotes/210598269/delayed
US : U.S.: ICE Futures U.S.
97.64
-0.06 -0.06%
Volume: 0.00
Dec. 9, 2019 4:40p
loading...
/zigman2/quotes/210599654/delayed
XX : STOXX
406.39
-0.96 -0.24%
Volume: 0.00
Dec. 9, 2019 5:50p
loading...
/zigman2/quotes/210598069/delayed
KR : Korea Exchange
2,088.65
+6.80 +0.33%
Volume: 393,126
Dec. 9, 2019 6:01p
loading...
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