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Have President Trump's protectionist policies gone overboard?
Once heralded as the most pro-business U.S. president since Ronald Reagan, Trump's zeal to shelter American businesses from global competition has caused many free-market economists to question his wisdom.
The stock market has benefitted wildly from the White House's corporate tax reform. Bulls remain in charge, but things are rapidly changing.
Trump's protectionist actions, combined with his erratic nature, have cast doubt on the markets.
The stock market hates uncertainty and doubts beyond all else.
Trump's negotiating style has dumped uncertainty into the markets at an unprecedented degree.
Nowhere is this economic uncertainty more vivid than the rapidly deteriorating U.S.-China trade relations.
Make no mistake, Trump's idea of fighting China's unfair trade practices is noble. However, his heavy-handed uncertainty in execution is resulting in greater economic harm than good. In fact, it may completely erase his tax reform-fueled market gains overtime.
The proposal of hitting the world's second-largest economy with 25% tariffs on $50 billion of imports will not only hurt the Chinese economy, it will have severe effects domestically.
China will not quietly sit still and accept the new tariffs; it will retaliate with a slate of its economic weapons. The National Retail Federation and the Consumer Technology Association have projected that the United States stands to lose a minimum of 455,000 jobs, which could climb to over a million jobs in a worst-case scenario.
Also, the tariffs will merely be passed along to American consumers who will suffer from higher prices. Higher prices and job losses is not a rosy scenario for the U.S. economy.
As stock market investors, our job is to best position our portfolios for maximum profit regardless of what occurs in the economy.
While no one really knows what is going to happen with the brewing U.S.-China trade war, it is certain that stocks are struggling to hold onto the bullish momentum.
It is indeed a no-win situation right now. Should Trump's policies go into full effect, the economic damage will be authentic.
If nothing takes place, the constant changes and subsequent confusion provide a daily ice water bath for the bulls.
As investors, we are always forced to make decisions in the face of uncertainty.
Despite the unknown future, right now an educated guess can be made that some, if not all, of Trump's protectionist measures will be implemented eventually. In other words, a trade war is likely.
Regardless, investors can expect both upside and downside volatility during these uncertain times!
What can investors do today to best exploit the pending economic reaction?
Here are three ways to win the pending China-U.S. trade war.
1. Buy The Companies Subject To Tariffs
I know this sounds completely counterintuitive, yet it makes perfect sense.
Interestingly, analysts at UBS have postulated that domestic companies producing goods subject to tariffs do little business in China will likely outperform during a trade war.
According to Barron's, UBS ran a screen searching for large firms with more than 2/3 of their assets held in the United States and less than 10% of revenue arising from China that also manufacture products subject to tariffs.
The primary companies identified fitting the bill are Hubbell (NYSE: HUBB), Roper Technologies (NYSE: ROP), and L3 (NYSE: LLL).
2. Short Semiconductors
Domestic companies with high exposure to the Chinese market are in danger due to the proposed tariffs. High technology is on the top of the sector list with Chinese exposure. Digging deeper into the high tech sector, semiconductor companies have the highest Chinese exposure.
Semiconductor maker Skyworks Solutions (NASDAQ: SWKS) generates an astounding 83% of its revenue from China, making it No. 1 on our short list!
Other semiconductor companies in danger include Qualcomm (NASDAQ: QCOM) with a 64% revenue exposure, and Intel (NASDAQ: INTC) with 24% of its revenue from China.
3. Short Boeing, Buy Airbus
Aircraft giant Boeing (NYSE: BA) is in the Chinese crosshairs to punish. Should China follow through with its threats against Boeing, it will be forced to buy more aircraft from Airbus (OTC: EADSF).
China is Boeing's largest single market making up around a fifth of the aircraft maker's deliveries in 2017. Right now Airbus and Boeing share an even split of the Chinese market.
Risks To Consider: The latest news is that a truce has been reached in the U.S.-China trade war. As you might expect, the news sent the futures market soaring higher with relief. Anything can happen from here. Be ready for the unexpected.
Action To Take: Consider implementing one or more of the above strategies to profit from the pending U.S.-China trade war. Expect sharp price moves in both directions as the scenario plays out!
As I'm sure you are all aware, stock prices have been unusually volatile lately...