President Trump wants to slap tariffs on foreign steel and aluminum to protect domestic producers. But it hasn’t gone down well with the investing community. The tariffs will increase the cost of companies that rely heavily on steel and aluminum, affecting their bottom lines. Further, these have raised anxieties that other countries will retaliate, increasing the odds of a trade war and harm to the global economy.
The tariff declaration incited a steep stock market selloff and a rebuke from world leaders. The Dow plunged for four straight trading sessions on Mar 2, while the industrials sector of the S&P 500 was hit the hardest. The Cboe Volatility Index (VIX), Wall Street’s so-called fear gauge came in at 19.59, way higher than a reading near 11 for most of 2017.
With the markets receiving a drubbing on Trump tariffs, investing in stocks that provide excellent risk-adjusted returns won’t be a bad proposition.
Trump Tariffs to Hurt U.S. Industrials
Trump surprised the global market by announcing steep tariffs on imported steel and aluminum. The President said that the United States will impose a 25% tariff on steel imports and a 10% tariff on aluminum.
But, tariffs on steel and aluminum have stoked concerns among manufacturers of cars, planes and machinery that rely heavily on such products. After all, steel and aluminum are major expenses for these industries, so an uptick in cost will hurt their profits. Needless to say, the tariff announcement has propelled steel prices to a six-year high of $840 per ton, while aluminum prices exploded to a two-year high at 17 cents per pound.
Higher prices on steel and aluminum, furthermore, will compel these companies that rely on such products to pass on some of the costs to consumers. Increased consumer prices may in the long run hamper sales growth and affect companies, leading to job losses. Trump’s tariffs are estimated to hurt nearly 6.5 million U.S. workers at steel and aluminum consuming manufacturers.
Retaliation Heats Up
The affected companies further cautioned that they may face retaliatory tariffs from foreign players against the goods they export, eventually denting their profit margins. Trump’s tariff announcement has already evoked anger among global leaders, with the European Union saying that it will impose tariffs on $3.5 billion worth of U.S. imports, as per Reuters.
China cautioned America to abide by multilateral trade rules and not to harm the delicate global economy. We shouldn’t forget that China is the world’s dominant steel producer and Trump’s tariff moves could easily start a trade war between them.
Tariffs also raise threats of a trade war with America’s closest ally, Canada. After all, Canada is the top exporter of both steel and aluminum from the United States. Canada is solely responsible for manufacturing 17% of all the U.S. steel imports and 43% of all aluminum imports. Other major suppliers to the United States, including Brazil, South Korea, Mexico and Russia will also be negatively impacted.
Tariffs news hit not only heavy users of steel and aluminum, but also cyclical-sensitive sectors like technology and consumer cyclicals to name a few. Investors remained worried that threats of retaliation by trade partners could harm global economic growth that was widely seen as the major driving force of the stock market’s rally last year.
Dow Companies Strongly Disagree With Trump Tariffs
Here is how some of the blue-chip companies responded to Trump tariffs:
The Coca-Cola Company KO agreed with Can Manufacturers Institute (CMI) President Robert Budway, who said that tariff restrictions will have a severe impact on the can manufacturing industry, its employees and consumers of such aluminum cans. Tariffs will increase price, lead to supply inefficiency and affect product availability.
Exxon Mobil Corporation XOM supported American Petroleum Institute (API) stance that they “support free trade” largely in the oil and natural gas industries, but in other industries as well.
JPMorgan Chase & Co. JPM shares its view with Joshua Bolten, chief executive of the Business Roundtable, who said that the industry group urges Trump to persuade “other approaches” to address issues related to overcapacity of steel and aluminum that won’t place the economy at high risk.
Walmart Inc. WMT stood by Retail Industry Leaders Association that said “Trump administration’s intention to unilaterally impose tariffs on steel and aluminum imports could have severely negative consequences for the American economy. If broadly applied, these tariffs will have a downstream impact on every sector.”
The Goldman Sachs Group, Inc. GS responded by saying that Trump’s tariff plan “is likely to escalate trade tensions, particularly as it looks likely to apply to a broad group of countries including to some allies of the U.S.”
5 Ultra-Safe Bets
Given such heightened tariff concerns, investors should build a strategy around low-risk assets and a combination of parameters that lead to better returns. The best way to go about doing this is by creating a portfolio of low-beta stocks that are inherently less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1.
These stocks are also dividend payers boasting immense financial strength and are immune to market vagaries. Such stocks reflect a solid financial structure, healthy underlying fundamentals and better quality business. Further, they boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Pfizer Inc. PFE develops, manufactures and sells healthcare products worldwide. The company has a Zacks Rank #2 and a beta of 0.91. The company has a dividend yield of 3.8%, while its five-year average dividend yield is 7.2%. The Zacks Consensus Estimate for its current-year earnings rose 7.7% in the last 60 days. The stock is expected to return 11.3% this year, higher than the industry’s estimated growth of 9.8%.
Verizon Communications Inc. VZ offers communications and information products and services to consumers, businesses and governmental agencies worldwide. The company has a Zacks Rank #2 and a beta of 0.68. The company has a dividend yield of 4.9%, while its five-year average dividend yield is 2.9%. The Zacks Consensus Estimate for its current-year earnings rose 16.5% in the last 60 days. The stock is expected to return 20.9% this year, higher than the industry’s estimated 2.2% growth.
Altria Group, Inc. MO manufactures and sells cigarettes, smokeless products, and wine in the United States. The company has a Zacks Rank #2 and a beta of 0.63. The company has a dividend yield of 4.2%, while its five-year average dividend yield is 8.5%. The Zacks Consensus Estimate for its current-year earnings rose 9.9% in the last 60 days. The stock is expected to return 18.3% this year, in contrast the industry, which is likely to decline 0.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Occidental Petroleum Corporation OXY engages in the acquisition, exploration and development of oil and gas properties in the United States and internationally. The company has a Zacks Rank #1 and a beta of 0.64. The company has a dividend yield of 4.7%, while its five-year average dividend yield is 4%. The Zacks Consensus Estimate for its current-year earnings rose 57.9% in the last 60 days. The stock is expected to return 191% this year, higher than the industry’s estimated gain of 12.5%.
Community Trust Bancorp, Inc. CTBI operates as the bank holding company for Community Trust Bank, Inc. that provides commercial and personal banking services to small and mid-sized communities. The company has a Zacks Rank #2 and a beta of 0.71. The company has a dividend yield of 3%, while its five-year average dividend yield is 3.1%. The Zacks Consensus Estimate for its current-year earnings rose 4.8% in the last 60 days. The stock, which is part of the Banks – Southeast industry, is expected to give solid returns of 17.9% in 2018.
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