How Investors Can Win in the China Trade War

Originally published on, September 17, 2019.

Trade War

AS SURELY AS SOME merchants jack up bottled water prices when a hurricane's a-coming, some base instinct moves investors to ponder – even if for a flash – how to make a few clams in the face of a calamity.

Mind you, this needn't be reprehensible, especially for investors. Billionaire Warren Buffett, a hero to many, once remarked that he loved to buy stocks when companies were "on the operating table." And on the flip side, some already robust outfits could turn even more attractive during the touch-and-go trade war with China.

"The trade war is clearly putting pressure on global economic and corporate profit growth," says Randy Watts, chief investment strategist and analyst at William O'Neil + Co. That's led to slower growth and lower bond yields – and means looking for stronger growth elsewhere.

For example, Watts' firm is targeting stocks that have above market dividend yields combined with earnings growth of at least 8%. It boils down to a list of 53 S&P 500 stocks.

"They outperformed the S&P for the last five years – and we expect that to continue," Watts says.

By now you may wonder who made that exclusive list. "Notable companies that fit these criteria include Home Depot (ticker: HD), Paychex (PAYX) and Lam Research (LRCX)," Watts says.

Speaking of Home Depot, there has emerged from the squabble a newly minted term: "Home Depot versus Caterpillar (CAT) effect." That's the label cited by Raul Elizalde, president of Path Financial in Sarasota, Florida.

"Since the beginning of the trade war, roughly the beginning of 2018, HD is up more than 20% while CAT is down more than 15%," Elizalde says.

As for the cause and effect of such up-and-down movement, "Companies with global revenue are expected to report declines in revenue and profits in the third quarter," Elizalde says. Meanwhile, "companies whose revenue is predominantly domestic are expected to report positive results for the third quarter."

Quincy Krosby, chief market strategist at Prudential Financial, also puts Caterpillar in the trade war hot seat, along with Apple (AAPL). She explains why: "They've seen their share of up and down moves as concerns over tariffs and overall trade relations have dominated the headlines."

As for the latter, Apple's fortunes tilt the way of the semiconductor market, not exactly a good thing with last week's unveiling of the iPhone XI.

"Semiconductor names have zigged and zagged as tariff-related headlines have affected the sub-sector," Krosby says.

And what's a headache for Apple has all the makings of a migraine for some market professionals.

"There are clear winners and clear losers and unfortunately, based on our practice in IT, we're participating with losers," says Marty Wolf, president and founder of martinwolf Global M&A Advisors in Scottsdale, Arizona.

The firm focuses exclusively on mergers-and-acquisitions advisory in the technology sector. He elaborates on the tech trouble this way: "The trade war disrupts the supply chains. Supply chains can't be created in the short term even if companies wanted to."

Thus while other nations might want to step in to fill the void, firing up new factories and the like isn't some magic wand exercise.

"If the trade war were to intensify, retail names would be at continued risk as costs rise," Krosby says. "The question is: Who would pay for the higher costs, the consumer or the retailer?"

In the niche market of DIY musical equipment kits, at least one retailer dealt bad news recently. Mammoth Electronics of Norman, Oklahoma sent an email to customers alerting them that prices would go up an unspecified amount.

"Last year, we made the executive decision to hold off on any price increases relating to Chinese imported goods," Mammoth says. "We had hopes that these trade regulations would stabilize and dissipate, but unfortunately, they have not."

Yet what consumers lose in terms of higher prices, they could gain back through smart investing to match the tenor of the times.

Experts also point to some unconventional investments that will bypass the China tgrade war altogether, even as they benefit from other news out of the District of Columbia.

"I'm a fan of commodities and maybe even cryptocurrencies, primarily bitcoin," says Merlin Rothfeld, investment strategist and instructor at Online Trading Academy, based in Irvine, California. "The reason for this is the likelihood of a weaker U.S. dollar. Currently the administration is pushing the Fed to lower rates, and that will ultimately push the dollar lower."

Those curious about bitcoin (now priced at roughly $10,300) will want to note that as a decentralized currency, it has a volatility all its own. That said, it's up 60 percent year over year from September 2018, when it fetched $6,326.

"Commodities that have already benefited from the ongoing trade war have been gold, silver and gold miners," says Michele "Mish" Schneider, director of trading education at, a financial publishing company. "Although they've all sold off from peak prices reached on Sept. 4, this correction is a buy opportunity."

Schneider bases this on a key metric. Gold and silver "cleared an 80 month moving average after six years of trading below it – and gold can see $1,500 or even $1,600 based on that key reversal."

In other words: Every trade war cloud may have its silver or gold lining.

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