Yesterday, the White House announced a complete embargo on the Chinese tech company Huawei. There have long been suspicions in the U.S. that Huawei are using their U.S. tech sales to in some way benefit the Chinese government, and the tensions that produced finally came to a head yesterday with the ban.
That ban lasted all the way through until this morning, when the administration reversed course, or rather, for now at least, delayed implementation of the order. I do not have access to the kind of intel that led to the ban, and nor, I’m sure, do you. It would be foolish to make a determination as to the legitimacy of the original action, or the likelihood that it will be fully enacted at a later date.
There are, however, lessons to be learned from this saga so far.
I started to contribute to Nasdaq.com just under seven years ago, and around a year later began Market Musings, a daily take on markets. That amounts to about 1,500 articles, so, as you can imagine, one of my biggest challenges at this point is avoiding repetition. That said, some things do bear repeating, and the Huawei story brings one of them to mind.
Even before the Trump administration began, I began making the point that traders and investors needed to rethink how they saw news. Ever since markets began, participants have been reacting to news stories of all kinds. Over the last few decades, as more economic control has been ceded by Congress to the Presidency, U.S. investors have become particularly sensitive to words from the White House.
Once this particular administration began, acting on White House pronouncements has been consistently a losing trade. The reason for that is epitomized in the Huawei affair.
After yesterday’s announcement, tech stocks with any kind of connection to Huawei got hit hard. Google (GOOG), for example, lost over $23, or around two percent, on the day. Then, this morning, after this became the latest policy to be adjusted on the fly, GOOG has gained nearly half of that back in the pre-market.
Apple (AAPL) reacted in an even more extreme way, losing over three percent yesterday before again recovering around half those losses this morning.
In these polarized political times, I guess your view of the politics of this probably depends on your beliefs. Some will no doubt say that Trump’s unpredictability is a calculated move to unsettle China, while other will say it is further evidence that he and his team are chaotic and act impulsively without thinking through the effects of their words and actions. Whichever side of that debate you fall on, it is once again clear that the only logical reaction to news from the White House is to wait for the initial reaction, then trade in the opposite direction.
If you went against the flow and bought either of those stocks on the drop yesterday, you are already in the money, and have enough of a cushion to set a stop-loss that guarantees a profit on the trade. Obviously, that kind of “trade to nothing” is a great position to have, and in this case it also has significantly more upside.
If history repeats itself in other ways as well, the market will be distracted by some other “blockbuster” news or tweet and all this will be quickly forgotten. Traders will probably mark it down as a negotiating tactic and convince themselves that it makes a beneficial resolution to the trade war more likely, and AAPL and GOOG will climb higher along with everything else.
Really, the most amazing thing about all this is the fact that despite being repeatedly burned, the market still takes pronouncements from this administration at face value. I am sure there will be occasions in the future when news like yesterday's will be actually be significant and the obvious trade will be the right one, but so far that has been rare enough that fading White House news is still the best strategy.