Uncertainty is everywhere; A disconnect between economic data and fear in the media; Be wary of Coca-Cola, Philip Morris International, and TJX Companies at these levels

1) As I read the Wall Street Journal and the business section of the New York Times, I have been struck by the volume of articles regarding economic uncertainty...

The underlying theme is how the turmoil triggered mainly by the Trump administration's tariff policies are creating uncertainty and resulting in cautious behavior almost everywhere.

Here's an overview from the NYT: With Only Bad Options, Businesses Scramble for a Tariff Chaos Playbook. Excerpt:

[Shock] is settling into reality, and corporate leaders are trying to manage. Here are the main tacks that businesses are taking – at least for now, given that whatever duties the White House declares today may change tomorrow.

• Move out of China, preferably yesterday
• Take the hit and hope it's temporary
• Batten down the hatches
• Sell fewer things
• Reduce, redirect, delay
• Raise prices, carefully
• Plead for mercy

Here's another from the NYT noting that the impact is being felt among young Americans: Gen Z Re-evaluates Its Budgets as a Global Trade War Rages. Excerpt:

Over the last two weeks, with tariffs announced, then suspended, the stock market swinging with each announcement's wake, many young adults have begun considering changing their habits around spending and saving to prepare for an uncertain economy.

The NYT also notes that it's being felt among U.S. farmers: China Is Finding Ways to Replace American Farmers. Excerpt:

The United States sells more soybeans to China, by value, than any other single product. Last year, that amounted to more than 27 million metric tons, worth $12.8 billion, or about 9 cents of every dollar of goods the United States sold to China.

But with the enormous tariffs erected between the two countries over the past two weeks, those sales are likely to suffer soon. That is bad news for the American farmers who grow soybeans and the Chinese chicken and hog farmers who buy them – and potentially very good news for the nation ready to step in: Brazil.

And as the WSJ notes, it's also among big U.S. banks: How Long Will Big U.S. Banks Continue to Lead the World? Excerpt:

Last year, U.S. banks occupied the top five spots for investment-banking revenue worldwide, and were seven of the top 10, according to Dealogic.

So when it comes to a global trade war, U.S. megabanks could become collateral damage. Many of Europe's champions retrenched over the past 15 years, while Chinese and Asian powerhouses have limited heft beyond their region. A long-lasting trade war could begin to change the playing field.

Already, U.S. banks have reported a slowdown in dealmaking activity, with clients on pause as they wait for clarity on trade policy. The risk is that they lose even the deals that are getting done to foreign rivals they previously bested.

And among advertisers (again from the NYT): Tariff Confusion Leaves Advertisers 'Paralyzed' and 'Somber.' Excerpt:

Persuading people to spend money in a time of unpredictable tariffs is proving to be a complicated calculation for the $380 billion American advertising industry...

Major companies were left in the lurch this month as the administration declared new tariffs, soon imposed them, reversed course a few days later and then doubled down on targeting China. Now, those advertisers feel "paralyzed," said Jay Pattisall, a principal analyst at Forrester, a research firm. Several companies declined to elaborate on their marketing strategies for the coming months or said they were in "wait and see" mode.

Finally, among sellers of luxury items (again from the WSJ): A Weak Dollar and Record Gold Price Are More Bad News for Luxury Stocks. Excerpt:

The moves are a problem for European luxury companies. Their businesses thrive when the dollar and yuan are strong and the euro is weak.

High-end brands manufacture their goods in Italy and France, so their costs are in euros. But they do most of their business with Chinese and American consumers, who together generate more than half of the luxury-goods industry's sales.

Keep in mind that all of these articles are just from two newspapers...

2) Could things end well? Perhaps...

As this WSJ article notes, we're not yet seeing the consequences in the economic data: Trump Is Everywhere Except in the Economic Data. Excerpt:

President Trump's deportations, tariffs, federal layoffs and funding suspensions have generated nonstop headlines and frayed confidence, yet left surprisingly little trace on the economy. Hiring, spending and inflation look a lot like they did under Joe Biden.

There are two possible explanations for this, one bearish, one bullish. Regarding the former, the article notes:

One obvious reason for the disconnect between the headlines and the data is time lags. Trump's first tariffs, on Canada, Mexico and China, took effect March 4; tariffs on steel and aluminum followed on March 12. His much bigger 10% universal tariff and 145% tariff on China took effect in early April. Tariffs on autos took effect in early April and will take effect on parts next month. Those tariffs won't show up until April data is released, in May. High reciprocal tariffs on major trading partners have been paused.

And since importers stocked up ahead of tariffs, it could be months before many newly levied tariffs get passed through to the final consumer. The foreign-born labor force could continue to swell with migrants who entered months ago, and federal employees who accepted deferred resignation could stay on the payroll until September.

But as the article continues, there's a more optimistic possibility:

Another explanation is that the U.S. economy is enormous. It is subject to countless influences, and actions by the president, even one as disruptive as Trump, aren't necessarily dominant.

My view leans toward the former, more bearish explanation – which is why I've still been saying to sit tight (rather than broadly sell or broadly buy). But I hope to be wrong!

3) As investors flee the stocks of companies exposed to tariff risks, they're piling into stocks that are perceived to be safe harbors. But if the valuations are too high, they might not be safe at all...

Consider three blue-chip stocks, beverage maker Coca-Cola (KO), cigarette seller Philip Morris International (PM), and discount retailer TJX Companies (TJX).

All are great businesses and don't have significant tariff risk (Coca-Cola and Philip Morris produce their products in each country or region they operate in, and TJX sells other retailers' excess inventory).

As you can see from their 10-year stock charts, all three are trading around all-time highs:

But let's take a look at their valuations...

At yesterday's close of $72.77 per share, KO is trading at about 24.6 times the expected earnings of $2.96 per share for this year.

At $162.18 per share, PM is trading at roughly 22.4 times this year's estimates of $7.24 per share.

And at $123.98 per share, TJX is trading at about 27.5 times this year's estimates of $4.51.

While those aren't nosebleed valuations, I would say they're very full – certainly not bargains.

I even found a bear case for Coca-Cola...

This anonymous analyst posted on social platform X last week that some states are taking steps to ban the purchase of sugary drinks by low-income Americans who are part of the Supplemental Nutrition Assistance Program (known as "SNAP," and formerly known as the Food Stamp Program), which accounts for 5% of Coca-Cola's U.S. sales:

In another post, he also argues that Coca-Cola's international sales could be hurt by rising anti-American sentiment:

I think this is a weak short thesis for Coca-Cola.

But at these richly valued current levels, I would be wary of buying Coca-Cola, Philip Morris International, and TJX...

Best regards,

Whitney

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