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A POSSIBLE REASON WHY THE TECHNOLOGY COMPANIES ABHOR DONALD TRUMP’S TRADE AND IMMIGRATION PROPOSALS

President Trump may soon label China a currency manipulator.  While I will skip the obvious notion that all countries manipulate their currencies either overtly (devaluation) or covertly (monetary policy), such a declaration may have wide ranging implications.

China is an export dominated country, defined as its economic wellbeing is dependent upon the financial health of its trading partners.  A dated Commerce Department statistic suggested about 45% of Chines production is slated for export, exports dominated to Western Europe, Japan and the US.  In other words, China is in a position of inherent weakness.

I reiterate a reason why electronic equipment and many other products are so inexpensive is because of trade policies, permitting exports from regions where labor is extremely cheap as compared to western wages.  If the cost of production rises, either margins contract or prices go up.   Either scenario may create more uncertainty.

If this increased production costs are unable to be passed onto the consumer, margins will drop, hence stock valuations will also drop.

If these higher costs could be passed on, inflationary pressures may accelerate.

The loudest protesters of Trump’s trade (and immigration) proposals are the technology companies, companies dependent upon cheap labor costs which permit greater access to their products via low prices.

Regarding stock valuation, in my view the technology companies are overvalued, representing about 24% of the capitalization of the S & P 500, eclipsing 2000’s record level which was then viewed as an absolute mania.

What happens if technology margins erode because of higher prices and inflationary pressures accelerate that forces a more hawkish Federal Reserve?  Technology companies would get killed from lower than expected future cashflows discounted at a higher risk free rate, amplified by lofty valuations suggesting there in no room for error.

Against this backdrop it is no wonder the technology companies are ardent distractors of the Trump administration, falling under the guise there is no interest like self-interest.

For the record, I think a trade war between the largest and second largest economies will end poorly albeit I am in favor of free trade, whatever this may mean., for such will support the common man and Main Street versus a few.

We do live in interesting times where life is indeed stranger than fiction.  So much for last year’s mantra that Donald Trump was behaving in such a manner to enable or permit Hillary Clinton to win the presidency for Trump then was also viewed as an elitist entrenched in the Establishment.

Last night the foreign markets were up.  London was up 0.30%, Paris up 0.78% and Frankfurt up 0.55%.  China was up 0.53%,  Japan down 0.53% and Hang Sang up 0.17%.

The Dow should open nominally higher.  The 10-year is off 9/32 to yield 2.36%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.