The 'Trade War' Goes From Bad to Worse
The 'trade war' goes from bad to worse... China retaliates with tariffs of its own... Expect the volatility to continue... Inching closer to 'inversion' again... Have you reserved your spot for the Bear Market Survival Event?...
Last week, we noted that U.S. stocks sold off as the 'trade war' with China suddenly escalated again...
Following weeks of positive talk from both sides, President Donald Trump unexpectedly threatened to raise new tariffs on Chinese imports at the beginning of last week.
Then, on Wednesday – just two days before officials were set to meet to finalize a deal – we learned why: China had suddenly "backtracked" on months of negotiations.
Finally, on Friday, we noted these new tariffs went into effect just as President Trump had warned... and the Chinese trade delegation left Washington, D.C., without a deal or definite plans to return.
If there was a bright side to this mess, it was that the markets ended the week on a relatively positive note. Stocks reversed their morning losses and closed in the green on Friday, following another round of optimistic comments from the president and several White House officials.
Unfortunately, the good times didn't last long...
U.S. stocks opened deeply in the red again this morning, following news that China had retaliated to the latest U.S. tariffs overnight. As the Wall Street Journal reported...
China fired back at the U.S. Monday, raising tariffs on roughly $60 billion worth of U.S. goods in retaliation for President Trump's decision to escalate tariffs on Chinese imports...
China said tariffs will increase to 10%, 20% or 25% for most of the 5,140 U.S. products on which it currently imposes levies of 5% or 10%. Goods that China will charge at 25% include animal products, frozen fruits and vegetables and seasonings. Goods it will charge at 20% include baking condiments, chemicals and vodka. Tariffs will stay at 5% for certain items, including vehicle parts, medical equipment and farm equipment such as tractors.
For now, China is not extending to items that aren't currently subject to levies, notably aircraft such as Boeing Co. jetliners and U.S. crude oil.
Regular readers won't be surprised that President Trump was less than thrilled by this move...
He replied with yet another barrage of tweets in response.
"China should not retaliate-will only get worse!" he wrote in one. "I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don't make a deal because companies will be forced to leave China for other countries. Too expensive to buy in China. You had a great deal, almost completed, & you backed out!" he said in another.
And unlike Friday, there wasn't any late-day reprieve for stocks today. The benchmark S&P 500 Index fell 2.4%, its worst one-day decline since January.
Now, it's worth noting that neither of these measures have actually taken effect just yet...
The U.S. tariffs were applied to goods leaving China beginning last Friday. The first of these items won't arrive in our country for a couple of weeks. Meanwhile, China's retaliatory tariffs don't take effect until June 1... So there is technically still time for a resolution to be reached.
We certainly hope that further escalation can be avoided. But given the events we've seen to date, we aren't holding our breath. We suspect this situation – and the resulting market volatility – could get worse before it gets better.
Speaking of troubling signs, the U.S. Treasury yield curve is moving back toward 'inversion' again...
As regular readers know, whenever the yield curve has "inverted" – that is, whenever short-term interest rates have exceeded long-term rates – bear markets and recessions have typically followed anywhere from six to 24 months later.
Back in December, we noted that a handful of "spreads" in the middle of the yield curve had inverted. As we wrote in the December 6 Digest...
The most widely followed measure of the yield curve – the difference between the yield on 10-year U.S. Treasury notes and two-year U.S. Treasury notes, known as the "2-10" spread – has fallen to just 0.115.
While this spread remains above zero for now, it's dangerously close to inverting. And two less-followed spreads – the "2-5" spread and the "3-5" spread – have already inverted, which suggests it's just a matter of time before the 2-10 does as well.
Fortunately, spreads then widened for several months as the market rallied to begin the year...
But it didn't last long. The yield curve began moving back toward inversion in March. As we noted in the March 22 Digest...
As of this week, more than 50% of spreads across the curve – ranging from the short-term federal funds rate through 30-year Treasurys – have now inverted...
Even more concerning, the median spread has now also turned negative for the first time since 2007...
However, once again the yield curve began to "steepen" before the 2-10 spread inverted.
Last week, the yield curve began to invert again...
As of today, the curve is inverted in 28 places – most notably from the three-month Treasury bill through 10-year Treasury notes – and is quickly approaching the extreme seen in March.
Again, we've not yet seen the most widely followed spreads invert. By this definition at least, the recession "countdown" has still not officially started.
But this is the third time we've seen a significant portion of the curve invert in the past six months. We'd be foolish not to take it seriously.
We'll be watching this closely...
In the meantime, be sure to tune into our Bear Market Survival Event this Wednesday.
Starting at 8 p.m. Eastern time, Porter and investing legend Jim Rogers will share their latest thoughts on the yield curve and a number of other critical indicators we're tracking today.
During this event, you'll learn why they believe the coming bear market could be the worst in our lifetimes... when they expect it to arrive... and most important, the simple steps you can start to take right now to protect yourself – and even profit – when it does.
It's absolutely free to attend... and you'll even get the name and ticker symbol of Porter's No. 1 bear market stock just for showing up. If you've not yet reserved your spot, click here to do so now.
New 52-week highs (as of 5/10/19): Hershey (HSY), McDonald's (MCD), Motorola Solutions (MSI), Nestlé (NSRGY), Starbucks (SBUX), T-Mobile (TMUS), Travelers (TRV), and Wells Fargo – Series W (WFC-PW).
In today's mailbag, one longtime subscriber shares a reminder about the importance of trailing stop losses... while another takes a hard look at his portfolio. What's on your mind? Let us know at feedback@stansberryresearch.com.
"I've been an Alliance member for over a decade now. I've had the privilege to take in vast amounts of knowledge, much of which, to my cost, I have ignored in the past. I don't do that so much now. Let me show you why. This week we got an alert telling us it was time to get out of our position in Kingstone (KINS). I liked this stock (I put 5% of my portfolio into it) and in the old days I would be tempted to stick it out despite the advice. Even the alert reinforced this thought by saying that all the reasons we bought it were still in place. However, the market didn't agree, the stop was hit and it was time to get out. I was able to get out at $10.40.
"As the week closed, I checked on the price and saw it was down to $8.51. That is [an] additional 18% drop in less than a week, a loss I didn't take because I have learnt, trailing stops work. That means I am 1% better off in a week by selling rather than hanging on hoping. One lesson learnt, many more to go. Thanks Team Stansberry." – Paid-up Stansberry Alliance member Ray R.
"Thanks for urging us to start getting prepared for a downturn in the market. It's something that I've been trying to work on for a while now by gradually increasing my allocation of what I hope will be defensive stocks while gradually decreasing my allocation to more risky ones, yet at the same time taking into account of Steve's Melt-Up thesis. I've signed up for the Bear Market program next Wednesday, although I won't be able to watch it in real time...
"Your poll question prompted me to take a look at the overall breakdown of my total portfolio. I know you can't provide investment advice and I'm not asking for any, but thought I would share with you what I found. I'm 58 years old and retired. My health is only fair and I don't expect to live to a ripe old age.
"Cash: 5.1%, Bonds: 25.5% (includes gov bonds, muni bonds, I.G. corp bonds, and preferred stock), U.S. Stocks: 55.5%, International Stocks: 10.7%, Metals: 3.1% (includes mining, royalties, bullion, and coins), Short: 0.1%.
"I'm reasonably satisfied with what I found, but plan to continue making gradual changes. I had a larger short/put position earlier in the year, but the losses got more than I could stomach and sold most of them about a month ago (bad timing). I plan to add back to this position at a later date; hope my timing will be better next time. Also plan to continue to increase the cash position. I actually thought I had a bit larger metals position than I actually have. I'll have to think about whether to increase that a bit.
"I also broke the stocks down into categories and will keep Doc's recent report on which categories do better in a bear market in mind as I continue to make adjustments over the next several months. I've been using the risk analyzer in TradeStops to determine position sizing for the last 2-3 years. I firmly believe in that strategy.
"I sincerely appreciate all that everyone at Stansberry Research and at TradeStops do to provide sound guidance to we investors. I'm a much better investor today as a result of your efforts." – Paid-up subscriber Billy N.
Regards,
Justin Brill
Baltimore, Maryland
May 13, 2019