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Hottest Wall Street Stories: What's Up, What's Down

Sweta Killa

Tariff tantrums hit the broader stock markets last month, leading to the worst May after 2010. Dow Jones fell 6.7%, the S&P 500 shed 6.6% and the Nasdaq tumbled 7.9%. Rough trading will likely continue this month given tit-for-tat tariffs between the two largest economies and a new tariff threat slapped at Mexico by the Trump administration.

Below we discuss these in detail and the impact on the stock world from these events:

Worsening U.S.-China Trade Spat

President Donald Trump increased tariff to 25% from 10% on Chinese goods worth of $200 billion from May 10 and has threatened to levy another 25% tariff on another $325 billion of Chinese goods. In retaliation, China is seeking to impose as much as 25% tariff on U.S. imports worth $60 billion effective Jun 1.

Additionally, Trump has threatened to blacklist Chinese firm Huawei Technologies and add it to its "entity list" which means American companies cannot provide tech to Huawei without government’s permission. Trump is also considering blacklisting other major Chinese technology companies including Hikvision, ZTE, Hytera and Dahua. In retaliation to this, China is seeking to restrict rare-earth exports to the United States.

As China exports about 80% of rare earths to the United States, the news has sparked strong optimism in the Chinese rare earth space, with a huge rally in shares of producers. This is because a similar move taken by China against Japan in 2010 pushed up the price of rare earth materials from China by more than 600% in 2011. However, U.S. companies that consume rare earth minerals will be hit hard if speculation comes true.

The worsening U.S.-China trade dispute led to worst trading in Apple AAPL and chipmakers, with PHLX Semiconductor Index plunging 17.5% in May. Notably, Qualcomm QCOM, NVIDIA NVDA and Micron Technology MU dropped 23.3%, 26%, and 23.4%, respectively. Meanwhile, Apple lost 16% in a month. Micron has a Zacks Rank #4 (Sell) while the other three stocks have a Zacks Rank #3 (Hold). 

Mexico on Latest Tariff Threat

The stock market rout worsened lately last week after the Trump administration threatened to slap tariffs on all goods coming from Mexico in a bid to curb illegal immigration. Washington will impose a 5% tariff from Jun 10 that will increase to 10% on Jul 1 if illegal immigration across the southern border is not stopped. Levies will then rise by 5% each month up to 25% by Oct 1. The tariff will permanently remain at the 25% level until and unless the crisis stops.

The move will hit a number of companies especially in the auto sector. This is because American carmakers have built vehicles in Mexico for years, taking advantage of its cheap labor, trade deals and proximity to the United States. Mexico is the world’s fifth-largest auto parts’ producer, and Mexico exports 90% of its auto parts to the United States, per the U.S. International Trade Administration. According to CNBC report, about 2.6 million vehicles were shipped from Mexico to the United States in 2018, almost double the 1.33 million vehicles imported in 2011.

In fact, the big three automakers — General Motors GM, Fiat Chrysler FCAU and Ford F — have billions of dollars at stake each due both production and suppliers in Mexico. As a result, GM was down 4.2%, FCAU shed 5.8% and Ford lost 2.3% on May 31, following the tariff announcement. Ford has a Zacks Rank #2 (Buy), General Motors has a Zacks Rank #3 and Fiat Chrysler has a Zacks Rank #4.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Oil Price Wild Swings

Oil price logged in the biggest monthly losses in six months amid trade wars that escalated fears of a global economic slowdown, leading to declining demand. This weighed on energy stocks in May, with Halcon Resources Corporation HK stealing the show declining 81.9%, followed by declines of 78.4% for Pioneer Energy Services Corp. PES and 70.7% for EP Energy Corporation EPEG. HK and PES have a Zacks Rank #3 while EPEG has a Zacks Rank #2.

Stocks Surviving the Rout

The tension led to investors’ flight to safety to defensive sector stocks. Also, companies which that are less immune to trade war or have a quality portfolio have surged. As a result, Obalon Therapeutics Inc. OBLN, Real Goods Solar Inc. RGSE and Oncobiologics Inc. OTLK emerged as winners in May, rising 255.9%, 247.2% and 108.7%, respectively. These stocks have a Zacks Rank #3 (Hold).

Homebuilders Shining

The housing market has been on a tear buoyed by a decline in mortgage rates and slower home price growth that have made house more affordable. This is especially true as the 30-year mortgage rates declined to below 4% for the first time since January 2018, according to Freddie Mac. Meanwhile, home price growth slowed for the 12th consecutive month in March, per the latest S&P CoreLogic Case-Shiller national home price index. Zacks Rank #2 Orion Energy Systems, Inc. OESX climbed 25.5% in May, followed by a 15% increase each in Arcosa Inc. ACA and Frontdoor Inc. FTDR. Arcosa has a Zacks Rank #1 (Strong Buy) and FTDR has a Zacks Rank #3.

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