The tariff war rages on, but U.S. stocks keep on trucking.
The Dow managed nearly a 200-point gain on Tuesday, its fifth-highest close in history, on a bet there is ample time for the U.S. and China continue to threaten a trade war.
“It is inexplicable, but it is a pattern we’ve seen all year,” Kristina Hooper, Invesco’s chief global market strategist, told Bloomberg Radio on Wednesday. And while carefree investors keep brushing those headlines away, she and others say diversification may be in order.
Enter our call of the day from a team of strategists at J.P. Morgan, led by Marko Kolanovic, who see headwinds for U.S. stocks, and suggest investors add some exposure to beaten-down emerging markets.
U.S. stocks are riding a “sugar high” thanks to the Trump tax cuts and the “delayed positive impact of weak U.S. dollar and low rates from last year, said Kolanovic and the team in a note to clients.
They expect that sweet boost will wear off in coming quarters as year-over-year comparisons in data and earnings decline, and the impact of a stronger dollar and higher interest rates kick in. As well, the prospect of big tariffs on China trade, if they materialize, would cut 2019 S&P 500 earnings per share, the strategists said.
The divergence between U.S. and international assets has likely “hit extreme levels” and won’t continue, therefore making for an “attractive entry point for taking contrarian positions,” they said.
Note their chart that shows August and year-to-date winners, with the Nasdaq on top and emerging markets dead last.
The biggest headwinds for stocks, according to J.P. Morgan, are the winds of those pesky trade wars, and they’re cautious even though they think the two sides will come to an agreement.
“As half of the trade with China now may be subject to tariffs, there is an increasing probability of corporate earnings being revised lower, dampening the sentiment toward U.S. stocks,” said the strategists whose U.S. overweights include tax beneficiaries and small-caps.
Dow YMZ8, -0.03% S&P 500 ESZ8, -0.12% and Nasdaq NQZ8, -0.16% futures are holding the flat line. That is after the S&P SPX, +0.54% Dow DJIA, +0.71% and Nasdaq COMP, +0.76% all closed higher on Tuesday.
Gold GCU8, -0.18% is up some, while crude US:CLU8 is bouncing around and the dollar DXY, -0.04% is off some, owing to strength in the U.K. pound GBPUSD, -0.0989%
Europe stocks SXXP, +0.04% are flat to higher, while China SHCOMP, +1.14% and Japan NIK, +1.08% led Asia higher.
The jury is clearly still out on whether pot investors will be rolling in it someday or end up like some unfortunate cryptocurrency investors. On the bearish side, the shorts focused on Tilray TLRY, +28.95% and Canopy CGC, +6.77% are growing in number and even paying hefty fees for those positions.
Tilray is up 18% premarket after surging nearly 29% Monday on news it got the green light to import pot from Canada for a medical trial. The stock’s breathtaking ride is laid out in our chart of the day, from Charlie Bilello, research director of Pensions Partners.
As a result of Monday’s rally, Tilray’s market cap ($14.4 billion according to FactSet) is now higher than nearly a third of S&P 500 companies, said Bilello, who added: “A month ago, its market cap was half as big as the smallest company in the S&P 500.”
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The leaders of both Koreas reaffirmed a pledge to rid the region of nukes at the second of three-day talks on Pyongyang, and North Korea says it will now let outside inspectors to visit its missile test site.
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