The Market’s Obsession with Tariffs by Bernhard Koepp
At C.J. Lawrence we are spending less time in our investment process trying to second guess the outcome of the trade war between the US and China but more on finding interesting investment opportunities in what we call “The Digital Divide”. We are focused on larger companies, which we call Bulldogs, that have the financial strength and market presence to benefit from technological transformation based on the implementation of three factors: Artificial intelligence, Blockchain technologies, and Cheap computing power, the ABCs of digital transformation. It is our natural bias, therefore, to fade investments in economically sensitive stocks, including semiconductors and industrials in favor of secular growers.
That brings us to the economy and the market’s obsession with the trade talks. It seems market practitioners are oblivious to the toll the current tariff war has already taken on the economy. Wall Street cheered the strong 3.2% GDP growth in the first quarter but ignored the fact that much of the growth came from an inventory build. According to the WSJ, final sales to domestic purchasers grew at just a 1.4% rate, the slowest since late 2015. The dramatic fade in the Institute for Supply Management’s Manufacturing (ISM) index from a peak of above 60 in mid-2018 to just under 53 is also a warning sign. A reading in this manufacturing index below 50 would point to a contracting economy.
The US economy is already in an extended late cycle thanks to the corporate sugar high from lower corporate taxes and deregulation. That stimulus fades in the second half of the year. A resolution of the tariff war may bring certainty back to global supply chains and create some clarity regarding the transfer of intellectual property, but it won’t alter the trajectory of the current business cycle.
Adam Seessel’s article in Barron’s last weekend titled “Why Value Investing is Broken” argues that as tech reshapes the economy, cheap stocks aren’t rebounding the way they once did. We agree and would cautioned a reallocation to value or more economically sensitive stocks while the outlook for stronger economic growth may have peaked. If your portfolios lack the ABC’s of digital transformation contact us at C.J. Lawrence for a copy of our latest publication called “Bulldogs, At the Forefront of Digital Transformation – The Pedigree to Succeed” and a review of your portfolios.
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