These U.S. Stocks May Be Shielded as Trump’s Trade War Hits

(Bloomberg) -- U.S. shares drifted lower Friday after a blow from President Trump’s follow-through on threats to boost tariffs.

But not all stocks were in the red as investors sifted for companies to buy. The usual trade suspects, including internationally-exposed industrial manufacturers and materials producers, like Caterpillar Inc. and Boeing Co., weren’t among the worst performers. That may be because some are still optimistic that the U.S. and China will eventually forge a deal, or perhaps as stocks may have already fallen far enough to take trade worries into account.

The S&P 500 Materials Index, hit earlier in the week by trade jitters, gained as much 0.4%, led by industrial gas company Linde PLC. That’s a stock investors looking to side-step trade questions may want to buy, Jefferies analyst Laurence Alexander wrote in a note.

These U.S. Stocks May Be Shielded as Trump’s Trade War Hits

“We believe industrial gases are relatively well positioned in case of an escalation,” Alexander said, as “take or pays should continue to deliver even if customers see utilization rates drop a tad, whereas the companies can sign new take-or-pays to new capacity expansions in other parts of the world as trade flows shift.” Linde gained as much as 3.9%, the most since October 22, after its CEO said profit could hit the top end of company guidance.

Pullback Overdue?

The standard gauge for industrials stocks, the S&P 500 Industrials Index, fell as much as 1.8% on Friday, to the lowest since March 29. The index had already dropped 3.2% this week through Thursday; after Friday’s losses, the index was down 4.9% versus the S&P 500 Index’s 4% decline for the week.

Those moves come as a pullback in the S&P 500 had been “overdue,” RBC strategist Lori Calvasina wrote in a note. “The breakdown of the trade talks comes at a time when we think the stock market is ripe for consolidation for other reasons,” she said.

At the same time, RBC expects “to be a buyer of this dip, as buybacks remain a strong pillar of support for the market, and sentiment/valuation pressures seem likely to be resolved over the summer.” For Friday, she flagged “staples and utilities for defensive purposes,” and energy and financials as “potential longer-term rebound plays.”

Calvasina will be watching corporate confidence, capital expenditures and hiring. “If the hits are too great,” she warned, “we’d consider lowering our year-end 2950 forecast on the S&P 500.”

Protect and Serve

Walmart Inc., Costco Wholesale Corp. and Target Corp. “have some protection from the impact of tariffs thanks to the large amount of food that they sell,” Bloomberg Intelligence’s Jennifer Bartashus said. These retailers have also said they’ll “leverage their scale to try to absorb at least some cost associated with tariffs before raising prices to consumers.”

Bartashus added that “virtually all 2019 holiday merchandise decisions are already complete (most retailers have that done by the end of March), and though no retailer is speaking about it specifically, ongoing tariff concerns may have factored into those plans.”

Those companies were mixed on Friday, with Walmart rising as much as 1.4%, Costco up 0.3%, and Target slipping as much as 2.4%.

“Apparel retailers are still shielded as apparel isn’t on the list,” Bloomberg Intelligence’s Poonam Goyal said. “The exposure to home and packaging puts some pressure but not as much as on others.” On the other hand, she flagged Dollar Tree Inc. and Dollar General Corp. as among companies currently most exposed. Dollar Tree was down 2.5%, while Dollar General fell as much as 2.2%.

Friday morning’s broad market moves seemed to indicate “investors still expect a deal” between the U.S. and China, State Street global macro strategist Marvin Loh said via telephone. He called markets’ reactions “relatively muted,” adding that investors haven’t fully embraced the year-to-date rally, and are still keeping cash on the sidelines.

Earlier, Goldman Sachs economists said that a delay ahead of collecting on the new tariff rate may offer an “unofficial window” for negotiation. Trump also tweeted that there was “no need to rush” a deal. RBC’s Calvasina said that “Trump’s tweets/deleted tweets/retweets early Friday morning on how there is no rush to do a deal with China have added to market confusion about where we are in the timetable.”

Meanwhile, the worst performer in the S&P 500 Index on Friday was Symantec Corp., a security-software maker beset by billings troubles and a CEO departure. Analysts slashing their targets didn’t mention the trade war. On the other side of the coin, Holdings Inc. is down nearly 8% after citing Trump tariffs in its disappointing forecast. And Uber’s CEO earlier blamed the tough day for the markets on China “uncertainty.”

©2019 Bloomberg L.P.