Is the Trump Trade Back On? How to Play It

Getty images

Getty images

Is the on-again/off-again so-called “Trump trade” finally back on? And will frustrated investors, who have been head-faked before into chasing the likes of Alcoa (AA), Freeport-McMoRan (FCX) and the SPDR S&P Metals and Mining ETF (XME), have clear direction this time?

As a presidential candidate, rebuilding the United State’s infrastructure was not only one of Donald Trump’s main campaign promises, but he declared his administration would implement trade restrictions on foreign companies (some call it “American protectionism”) that would reduce the pricing pressures on domestic products, particularly American steel and aluminum.

So it should have come as no surprise when President Trump last week, though to the dismay of Republican congressional leaders, announced that the U.S. would impose a 25% tariff on steel imports. “…You will have protection for the first time in a long while, and you’re going to regrow your industries,” the president said.

Trump’s announcement sent shivers through the stock market, which ended last Thursday’s session with the Dow Jones Industrial Average plunging almost 600 points, before closing the day down 420 points. Escalation of the President’s trade offensive would cause affected U.S. trading-partner countries, particularly China, to retaliate via other trade channels.

Why did Trump feel he needed to make the tariff announcement now, including the 10% tariff for aluminum, which sent steel stocks such as AK Steel (AKS) and U.S. Steel (X) soaring 10% and 8%, respectively, Thursday? Among other reasons, the president cited the U.S. deficit with China, which last year hit a record$375 billion. The U.S. also ranks as the world’s largest steel importer, according to International Trade Administration’s Global steel Trade Monitor report, importing some 27 million metric tons of steel imported between January and September 2017.

Meanwhile, the Commerce Department last last month suggested that rising import volumes threatened U.S. national security. Commerce Secretary Wilbur Ross insists that excess steel and aluminum production around the world hurts prices, further pressuring U.S. factories into closure. But what might be good for steel and aluminum stocks may hurt other sectors such as automakers Ford (F) and General Motors (GM), which are heavy users of both metals.

Auto manufacturers warn that higher metal prices will not only hurt their sales, but may lead to layoffs similar to what occurred back in 2002 when imposed steel tariffs under President Bush triggered the loss of some 200,000 jobs. Rufus H. Yerxa, president of the National Foreign Trade Council, which represents multinational giants, including Dow component Procter & Gamble (PG) sees it differently.

“They’re basically saying that economic security is national security,” Yerxa said. Adding, ”That becomes an excuse for any country in the world to do whatever it wants.” Commerce Secretary Wilbur Ross, citing that more than half of U.S. aluminum capacity lies dormant, while steel mills are operating at only 73% of capacity, has a more pragmatic view.

With both pros and cons weighing heavily on the president’s tariff decision — not to mention various industries and trade partners, including Canada and Mexico in the crosshairs — the tariffs might still have a long way to go before being implemented. In other words, investors should wait for more clarity. Meanwhile, with multinational stocks like McDonald’s (MCD) and Caterpillar (CAT) trading at discounted prices, after losing almost 10% of their value last week, could be a rewarding way to play the off-again side of the Trump trade.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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