Jim Cramer: The Market Thinks China Will Blink First in Trade War
Are we inured to Chinese tariff talk? Judging by the stock performance of the companies most in the crosshairs of the coming tariffs, we sure seem to be.
How else is it possible that the stock market can keep climbing in the face of tariffs on what may end up being $467 billion, pretty much everything the Chinese sell here? Aren't investors fearful of retaliation anymore? Or do they think that the tariffs won't be enacted because the Chinese will blink at the last minute and give in to our demands.
At this point, it's one or the other -- or perhaps both.
I pose the question because with the exception of the two industrials that are considered to have the most to lose from a trade war -- Boeing (BA) and Caterpillar (CAT) -- almost all are rallying like crazy. And even Boeing, which sells about one in four planes to China, has a stock that's still up 15% for the year.
The only stocks that have really been hurt so far are those of the semiconductors -- and most recently, Apple (AAPL) . And even then, many semis have had a good run and Apple's stock hasn't been all that bruised by the news of some potential duties on its accessories made in China. It's still up 29% for the year.
Much of the semiconductor stock weakness comes from what looked to be the end of takeovers in the group, when the Chinese blocked Qualcomm's (QCOM) attempt to buy NXP Semi (NXPI) at a big premium. We will soon find out if the Chinese want to quash all deals -- and not just American deals -- when today's $6.7 billion acquisition of Integrated Device Technologies by Renesas Electronics (RNECY) comes before the Chinese authorities for approval.
How is this lack of weakness or, some would say, complacency, possible? I think many American manufacturers that export from China have far more mobility than the Chinese thought. President Trump wants manufacturing to come back to the U.S. But Thailand, Vietnam, Cambodia and a host of other Asian nations are thirsting for the business -- and our companies are quenching that thirst.
That's why so many stocks that source from China -- like those of Five Below (FIVE) , Dollar General (DG) , Target (TGT) , Kohl's (KSS) or RH (RH) , to name a few -- aren't being hurt nearly as much as we thought would be the case eight months ago.
The real quandary, though, are the stocks of the likes of Honeywell (HON) , Emerson Electric (EMR) and 3M (MMM) -- Action Alerts Plus club names with substantial business in China that should be hurt by the trade war. Last week Honeywell's CEO, Darius Adamczyk, made it very clear on Mad Money that he's not all that worried about his gigantic business in China -- because what he makes in China stays in China, so it shouldn't be hit by tariffs from either side. That's a huge statement when you consider that the company does $2.4 billion -- about 5% of its business -- there. But more importantly, China is responsible for 70% of the company's growth.
I am flummoxed by how well the stock of 3M's been doing, because the company has gigantic exposure to China -- $3.2 billion, or 10% of the company's business. It's got nine manufacturing sites and 6000 employees. But nonetheless, in the teeth of these new tariffs, the stock has gone from $190 to $215.
Emerson's been doing business in China for 40 years -- and China is its biggest international market for growth. If the tariffs were really stringent on either side, this stock, too, should be going lower instead of just hitting an all-time high.
These performances are an indication that either the Chinese are going to blink or it just doesn't matter enough to hurt earnings per share.
How about boycotts? I was concerned about the Chinese subtly encouraging just that against Starbucks (SBUX) but now that Starbucks tied up with Jack Ma to handle some key issues that had hurt the company of late in the PRC, the worry's gone and the stock's going higher. Yum China (YUMC) ? Doing fine. Nike (NKE) ? Better than fine, as sales keep expanding rapidly in China.
I think we have to conclude right now that the earnings per share losses just won't be that great or that relevant on our end. Isn't that what the S&P 500 is saying, with a gain of almost 8%? And the idea that the Chinese might be blinking? If stock markets are decent barometers, which I think they are, then
Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long KSS, EMR, AAPL, HON.