Geopolitical Developments
By electing a non-politician but rather a tough dealing businessman as president, America was sending a message, and it was prepared to go about business not as usual. Thus far, it has been that, and so much more. President Trump’s unorthodox use of hard negotiations, cutting out layers of bureaucracy, and taking a hands-on approach has rankled an array of critics. However, halfway through his first term, he has yielded big deals and holds potential for even larger monumental deals.
China
The 80-minute lunch between President Trump and President Xi has jumpstarted a restart of trade negotiations for the two nations. President Trump has put potential tariffs of $300 billion on imported goods on hold and will allow American technology firms to continue to sell components to Huawei.
The Huawei decision has elicited criticism from Senators Rubio and Schumer, but the business community should be thrilled. To be clear, this is not a reprieve for Huawei to sell into the United States or be a part of our 5G development. Moreover, work is being done to ultimately limit U.S. technology that would allow Huawei to use chokepoints to gain control over sovereign wireless networks.
I have mixed feelings on the Huawei part, but I understood the entire time that the goals of the administration have been free and fair trade, not to destroy China’s economy. On the contrary, we want a thriving global economy if it’s not via theft of American know-how and jobs.
I suspect at this point that China understands President Trump works on tight timelines and will need to see some positive reciprocal action very soon. It’s not the same as saying a deal will happen soon. In fact, Wall Street could deal with ongoing talks for a very long stretch if there are periodic milestones that provide optimism and progress.
This “trade war” is not just one year old. It’s been going on for several decades. In fact, only a few other geopolitical issues have dwelled longer than this lopsided relationship, and one is the situation in North Korea.
North Korea
This isn’t your grandfather’s statecraft – thankfully.
President Trump put out a tweet letting Kim Jong-un know he’s in the neighborhood and would like to stop by. Kim said ???.
The historic meeting between the two leaders is the first time a sitting American president stepped foot on North Korean soil. There were smiles and pleasantries, and then a 50-minute meeting. It appears the failed meeting in Hanoi is now a thing of the past, and once again, talks between the two nations will resume.
North Korea doesn’t have the economic implications of a potential deal with China. Therefore, the curbing of their belligerence and tackling the need to rid the nation of nuclear weapons makes this news the biggest of the weekend. Forget about the media whining about putting Kim on the world stage or giving him credibility – his nukes gave him that a long time ago.
America and the world sat back and allowed the Hermit Kingdom to gather nuclear weapons, and even exported that expertise and did nothing. Old-school diplomacy and back channels only embolden North Koreans and other bad actors. This approach is welcomed, and I think it will yield results, but like China on trade, these issues with North Korea were allowed to fester and metastasize for decades.
There is a good chance we will look back years from now, and at this past weekend and say, it changed everything (just not overnight) for the betterment of mankind.
The stock market should be pleased with the geopolitical news and the progress made over this past decade.
Economic Data
All eyes will be on the employment report on Friday. Before then, we’ll get a lot of data that will probably change estimates for jobs created in June. Coming into the week, the official estimate is 164,000 jobs for June. This wouldn’t be bad for an economy that arguably is at full employment. I suspect there will be a sharp revision higher to the May number.
We begin today with the ISM Manufacturing number, which is expected to decline to 51.0 from 52.1 in May. That would be enough to add to the worries at the Federal Reserve. Considering the monster miss for the Chicago Purchasing Manager’s Index (PMI), which was weighed down by a giant drop in new orders, many are bracing for a number that points to contraction this morning.
Manufacturing isn’t the largest part of our economy. However, it’s critically important for many reasons, and a big miss for the Institute for Supply Management (ISM) today will put a 50-basis point (BPS) rate cut back on the table.
The Market
I love what’s happening beneath the surface on the stock market. Market breadth has improved dramatically, and more stocks are participating in the rally. It’s true that bad news is greeted with a sledgehammer, which still makes this a stock-pickers market. The financial media loathe saying anything positive about this administration and will not point out market breadth or other pluses, which is fine for those positioned to take advantage of the opportunity.
Others waiting for the media to report good news will continue to miss the rally.
Portfolio Approach
Communication Services | Consumer Discretionary | Consumer Staples |
1 | 4 | 1 |
Energy | Financials | Healthcare |
1 | 2 | 1 |
Industrial | Materials | Real Estate |
2 | 3 | 1 |
Technology | Utilities | Cash |
2 | 0 | 2 |
Today’s Session
The pre-open surge has held up all morning, even as Boeing (BA) shares slipped; their problems continue to mount. Although a lot of the move is a sigh of relief, don’t discount comments made this morning from Fed Vice Chairman Clarida.
At a Bank of Finland conference in Helsinki, Clarida reiterated the Fed’s determination to keep the party going: “We will certainly act as appropriate to put in place policies that sustain the economic expansion, and the strong labor market and price stability.”
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