The trade deficit always goes up when the economy is strong and plummets when the economy sinks, as it did during both the Great Depression of the 1930s and the Great Recession of 2008–09. – Stephen Moore
The trade deficit fell 12.2% to $39.9 billion in Feb 2020 because of the disruption caused by the pandemic. Earlier, China was closed for business – now, the whole world is in lockdown mode. It is child’s play to guess that trade numbers will continue to worsen until the contagion tapers off.
Image Source: Bureau of Economic Analysis
The interpretation of economic indicators depends on circumstances and events. In Jan 2020, the trade deficit hit its lowest level since May 2018, and at that time it was a bullish signal. This time it’s bearish.
I analyze the fundamental and technical indicators and events in The Lead-Lag Report that have the potential to influence stock prices in the near term. There are very interesting things happening in terms of the risk-on, risk-off signals that got subscribers out of risk assets Jan. 27 before it was too late. In this post, I have dived deep into the trade deficit numbers and fished out clues that can impact a few stocks and industries – negatively or positively – in the short term.
The Precision Equipment Industry
Per the Grubel–Lloyd Index (GLI), precision instrument manufacturers are hugely dependent on China for parts supply. This industry will be impacted the most.
Image Source: UNCTAD
This supply disruption has come at an unfortunate moment because precision components are used by medical equipment makers. The pandemic has worsened in our country and the FDA has a tough job on its hands per its last update. China, meanwhile, has started reopening its manufacturing facilities but the situation is still very fragile.
In the very short term, American medical device manufacturers and precision equipment makers are expected to be under a lot of pressure. However, the demand for medical equipment (especially ventilators) has increased exponentially. Investors who like to turn a crisis into an opportunity can track the following stocks: Medtronic (MDT), Johnson & Johnson (JNJ), Becton, Dickinson (BDX), and a few more. Mission-critical companies such as these usually have adequate risk management procedures in place and may have stocked up on parts.
Though the import of vehicles in Feb 2020 increased by $1.4 billion, the automotive industry may feel the blow from March 2020 on. Reduced demand for automobiles, upheaval in the global supply chain, and policy decisions by the government are factors that may make the automotive sector shake and rattle in the short term.
American auto manufacturers depend on China for parts such as wheels, brake, steering components, and electronics. The industry expects a substantial hit but cannot estimate the extent of the hit in dollars. To get an idea where this is going, sample this: GM (NYSE:GM) reported a 7.1% drop in sales in Q1 2020, Fiat Chrysler (NYSE:FCAU) reported a 10.4% slide, and Nissan Motor’s (OTCPK:NSANY) sales plummeted 29.6% in the same period.
While no one can estimate the extent of the hit, what is scary is that the disruption set in just early March and within a couple of weeks, it has knocked out the entire industry. I would avoid investing in this sector now.
Capital Goods Industry
Capital goods (excluding automotive) imports decreased to $56302 million in Feb 2020 from $60359 million month over month. PWC estimates that in the near term capital goods manufacturers will witness a sharp fall in demand and liquidity issues and a sharp rise in debt-related problems. They may have to dispose of underperforming assets, assess M&A prospects, and consider refinancing debt.
Image Source: Trading Economics
The government’s $2 trillion package is largely for socialist purposes and won’t help the industry much. I would, therefore, stay away from this sector.
Notes on other Industries
(1) Travel, financial and logistics services fell by $1.3 billion, $0.3 billion and $0.2 billion, respectively. These industries may not perform well in the near term.
(2) Fuel oil exports increased $0.5 billion – but this may be short-lived. Per a report published on Apr 3, 2020, in The WSJ, the Trump administration considered a shutdown of oil production in the Gulf of Mexico because some crew members got infected by the coronavirus.
No announcement has been made yet but if it happens, approximately 2 million barrels per day will be taken off the market, leading to a rise in prices. Exports would fall, the deficit would rise, but shale oil producers would heave a sigh of relief. Investors can consider buying crude oil (CL1:COM) if the shutdown is announced.
(3) Exports of gem diamonds decreased $0.2 billion and this industry should get whipped in the near term as consumerism drops and people hoard up cash.
Every piece of data helps us make potent investing decisions so long as we read it right. From the trade deficit data and subsequent events, it can be inferred that: (A) The medical devices industry and perhaps crude oil can do well in the near term. Crude oil doing well depends on the Gulf of Mexico decision discussed above.
(B) The automotive, capital goods and the gem diamond industries can be avoided.
(C) Travel, financial and logistics services can be avoided.
Remember – everything in this business of investing is about conditions favoring risk. These areas should help with how to play offense and defense when those conditions present themselves.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.