From Tariff Handwringing To Fundamentals

Posted: Mar 07, 2018 12:18 PM
From Tariff Handwringing To Fundamentals

The stock market continues to meander. And while all the on-air chatter was about tariffs and global trade with the typical dose of fear-mongering, I suspect this market is marking time for something much more important. The February jobs report out on Friday will have provided an interesting twist to see if good news is good news of good news, or if bad news is good news. 

I’m referring to the last jobs report, which uncorked the volatility genie when wages increased more than expected.  I continue to marvel at the reaction of Wall Street. The overall increase in wages was +2.9% in January, which matched the high last reached back in June 2009.

However, the number is still much well below what most people used to consider a nominal wage growth.  Moreover, when it comes to non-supervisory workers, this moment of catch-up is delayed too long.  In January, non-supervisory wages increased +2.4%, significantly below the 4.1% increase back in March 2007.

So, Main Street will be rooting for more wage gains, but the Wall Street ivory tower folks might frown on everyone else getting raises.

Click here to view the chart.

Stellar Earnings Results

One of the reasons market bias is turning higher is corporate earnings and guidance. According to factSet, with 97% of companies’ earnings coming into the week, the results have been remarkable: 


  • 77% beat on sales
  • Blended gains: 8.2%, the highest since 3Q 2011, 12.5%


  • 74% beat on sales
  • Blended gains: 14.8%, the highest since 3Q 2011, 16.8%

Sharpening Pencil

Perhaps the most compelling part of earnings season is the fact that after two months, the Street hiked its earnings estimate for the quarter and the full-year. For the quarter, the Street hiked consensus to $36.32 from $34.37, or 5.7%.  It’s the first time in more than five years earnings consensus has risen (see chart).

Full-year earnings consensus from the start of the year to now climbed to $157.97 from $147.24. As noted in the FactSet report, some of this can be attributed to tax reform, but most analysts knew how to model for that before results began. 

I think this is more about a robust economy and management having the confidence to provide stronger guidance.

Click here to view the chart.

With the recent correction worries of valuation, although faded, there are some purists looking for ever lower levels. Ratios are important, but there are so many more factors that rank higher in our decision-making process.  On that note, however, I like the forward price-to-earnings (P/E) ratio better than other metrics.

We are looking for $170.00 earnings for the S&P 500, and I think at some point, the forward P/E will get back to 18 times, which means the S&P 500 has potential to 3,060 or 12% higher than yesterday’s close.

Click here to view the chart.

Message of the Market

On Tuesday, the market edged higher into the close, even as President Trump explained his intention to fix our trade, and even called out our “friends” like Sweden. Sure, there’s a chance Mexico and Canada can escape the industrial metals tariffs, but this isn’t a bluff.  Moreover, our North American Free Trade Agreement (NAFTA) partners are taking it seriously as they have a lot more to lose.

After the close, Mexico reported its first two months of auto exports to the United States, which increased 9.5%, and it’s now on pace to produce more than four million autos for the first time ever.  Trade Wars are ugly, but living with unfair trade deals is stupid when you have the purchasing power:

Breadth: NYSE

  • 2,033 advancers
  • 923 decliners
  • 90 new highs
  • 34 new lows
  • 2.1 billion Up volume
  • 1.2 billion Down volume

Breadth: NASDAQ

  • 1,894 advancers
  • 1,013 decliners
  • 136 new highs
  • 27 new lows
  • 1.4 billion Up volume
  • 708 million Down volume

We get the ADP National Employment Report today, which hastens the countdown to the government jobs report on Friday.

Today’s Session

It’s all about the resignation of Gary Cohn and Wall Street is ready to have another temper tantrum.   Cohn was always going to leave the White House, his work was done, and he wasn’t on board with the rest of the Trump economic agenda.

Economic Nationalism

When Steve Bannon was banished from the White House, it seemed like so-called “Economic Nationalism” was banished with him.  Soon after, President Trump publicly chided Wilbur Ross, and we never heard from Peter Navarro.

That’s all changed. 

Many are saying Navarro could get the top economic adviser job (my buddy Larry Kudlow is also in the running, but he has been very public with his disdain for tariffs).  This is obviously a two-prong strategy from the White House.

  • Political in the sense it’s at the heart of an America First approach to governing.
  • Economic because all the other establishment ideas have only left America less powerful and influential.

Honest Discussion

All the establishment experts keep screaming about the dangers of an economic trade war pushing America into a fetal position that the world’s richest nation shouldn’t find itself in while at the crossroads.  We can take a stand now on the economy and military might or countdown the clock to the transfer of power and influence to China and others.

Part one of my March 2018 Newsletter lays out some facts about trade and tariffs…here’s part of my thinking.

Since the nation is embroiled in a discussion about tariffs and a possible trade war, I think we should lay out some simple facts and ask some questions to all the economic mavens that have watched jobs in America’s heartland vanish to other nations.

First, right now, every country in the world uses tariffs.  The average tariff on all products in 2016 was 7.0%, with the highest being 23% on food, and the lowest 3% on fuels.

Most Favored Nation Average Global Tariffs 2016



All Products










Textiles & Clothes


Hides & Skins


Stone & Glass


Plastics & Rubber




Machine & Electric








                       Source: World Bank 

Second, nations poised to dominate the world’s economy in the next decade have two things in common: superfast growth over the last decade and huge average tariffs on imports.  If tariffs are an economic death knell, they are taking a long time to slow down China and India and others.


2008-17 growth

MFN Tariff







South Korea



United States



Third, China’s dominance in steel came through overproduction and government subsidies.  It all began to ramp up in the late 1990s…

Click here to view the chart.

…and as America watched haplessly, more than 50,000 steel-workers lost their jobs. Now, the same experts that cheered cheap steel and aluminum tell these unemployed folks to appreciate the low cost of their beer cans.

Click here to view the chart.

I’m not a protectionist, but there is something wrong with our current trade arrangements around the world. I think we need to stop screaming about Smoot-Hawley every time anyone dares to upset the apple cart.

America is in a trade war, and those not looking to save a few bucks on their next Mercedes are losing.

Now, let’s have an honest discussion.

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While the markets are set to open lower, I'm pumped and wanted to see the market test lows.  This is the best way, on news that in the grand scheme of things is inconsequential.

This morning, the February ADP report blew it out of the park, adding 235,000 jobs versus consensus of 180,000.  January was revised up 10,000 to 244,000.  This marks 4 consecutive months that we have added more than 200,000 jobs.  We will have a more in-depth look at this in the afternoon note.