All Eyes On G20 Summit: Brace For Increased Saber-Rattling

All major equity indices are back to double-digit gains for the year, and now investors are asking, what’s next? 

All eyes will be on the G20 summit in two weeks, bracing for increased saber-rattling up to the moment of President Trump and President Xi carving out time for some one-on-one discussions on trade. Last week, both sides were mostly talking nicely. While President Trump says he might levy more tariffs if Xi doesn’t show, it’s clear nothing will happen until after June 28^th.

On Monday, the rally ran out of steam into the close, in part to news Jerry Nadler got the Department of Justice (DOJ) to share some of Mueller’s notes on obstruction, but mostly because that’s what happens after a parabolic blast in the market – profit-taking.

Market breadth was decidedly better, especially on the NYSE where there were 207 new 52-week highs versus 26 52-week lows. Technology continues to surge, buoyed by merger mania.

Will Chamber Help Socialist Movement?

Corporate profits stalled for years, but now average more than $2.0 trillion a quarter, and the most recent quarter saw a net cash flow rise to $2.62 trillion.

I’m an investor, and I focus on the ability for companies to raise prices without impacting volume and expand profit margins. So, I get it. However, I also understand there are certain fights that bring a nation together and put things like higher margins and stock buybacks on the back burner.

US Corp Profits five-year chart

US Corp Profits 69-year chart

Too Much Greed?

By now, most people know the Chamber of Commerce has been a harsh critic of President Trump and his approach to changing behavior using tariffs or threat of tariffs.  Tariffs have been frowned upon since the Great Depression after Smoot-Hawley tariffs pushed the nation deeper into the economic abyss.  And yet, there have been other times in American history when tariffs were used successfully for a variety of issues, including the main source of revenue to the federal government until the implementation of individual income taxes.  Be that as it may, there is economic harm for everyone, although it’s mitigated for America with its strong economy and strong currency.

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The point is, like any war, everyone is expected to make sacrifices. The Chamber of Commerce doesn’t want big business to take any hits to their profit margins. Therein lies the problem. This behavior is seen more and more as selfish or greedy, putting Trump voters on the same page of liberal voters. Just consider that the profit growth for corporate America has been historically mind-boggling. More recently, profits have shifted into the stratosphere under new tax and regulatory policies.

I would love to see everyone put skin in the game rather than making tough fights even more difficult. 

Portfolio Approach

Our cash position is back to its lowest natural level, so I wouldn’t be averse to taking some profits sooner than normal in this extraordinarily volatile environment. For the most part, we are going to stick with fundamentals, but ringing the register and raising cash is always a great option, too.

Today’s Session

Futures are up strongly again this morning.  This is my bounce - I saw it and called it.  The major indices are at all-time highs, and buyers are continuing to enter the market. The Dow has risen about 1300 points in 6 days, after having declined for 6 weeks on worries about trade and tariffs with China and Mexico.   This month, Technology and Materials have been the leaders, verses being the losers.

Economic data continues to indicate that inflation is tame, which is music to the Fed’s ears, or at least for those cheering for a rate cut.  This morning, Producer Price Index (PPI) final demand for April came confirmed this.  PPI came in as expected, up 0.2% from March.  Year over year PPI increased 2.2%.  Core PPI, less food and energy, was up only 0.1%, while year over year its up 2.4%.