By Michael Wursthorn and Akane Otani
Dozens of stocks remain stuck in bear-market territory even as
the U.S. stock market has charged to records, reflecting a
disconnect that shows a robust economy hasn't offset trade jitters
for many American conglomerates.
The trade fight has weighed particularly hard on shares of
industrials and materials companies, which account for about
one-fifth of the 80 stocks in the S&P 500 that have tumbled at
least 20% from their 52-week highs -- the common definition of a
bear market.
Motorcycle manufacturer Harley-Davidson Inc., appliance maker
Whirlpool Corp., tool company Stanley Black & Decker Inc. and
machinery builder Caterpillar Inc. are among the biggest stocks
that have slumped more than 20%, largely due to trade-related woes.
Many of the companies that missed out on the broader rally have
said trade tensions have raised their costs, damped their profit
outlooks or forced them to scrap projects.
Despite the stumbles, the broader market has recovered from the
inflation- and trade-fueled volatility that put the nine-year rally
on hold for most of 2018. The S&P 500 closed Friday a whisker
short of Thursday's record, while the Dow Jones Industrial Average
ended at an all-time high, finishing its best week since
mid-July.
Investors have ranked a trade war as the top tail risk to the
markets for four consecutive months, Bank of America Merrill Lynch
said in its September survey of global fund managers. Fears that
tighter trade policies could crimp growth also have hit fund
managers' global outlooks, with 24% of investors expecting global
growth to slow in the next year, up from 7% in August.
"There's a number of money managers who've been hesitant to be
involved with the [companies] that are going to be potentially
affected by the tariffs, whether they'll be able to export fewer
goods or be buying less from China," said Mark Grant, managing
director and chief global strategist at B. Riley FBR Inc.
Many of the firms that investors say have been most vulnerable
to the trade rift fall in the industrial and materials sectors.
Among some of the hard-hit industrials stocks, engine maker
Cummins Inc. is currently down 23% from its 52-week high after
falling as much as 32%, hit by 25% tariffs on the small diesel
engines and components it imports from its plants in China. Stanley
Black & Decker, which has had to weigh replacing U.S. suppliers
with foreign ones because of steel and aluminum tariffs, fell as
low as 25% from its 52-week high and remains down 14%.
Materials companies, meanwhile, have suffered as the cloudy
outlook for global growth has sent copper prices lower. Newmont
Mining Corp. has fallen 26% from its high, while Freeport-McMoRan
Inc. has lost 29%.
Auto makers and retailers that cater to drivers are another
group of laggards. Ford Motor Co., down 28% from its 52-week high,
earlier in the month scrapped plans to import its Focus vehicle to
the U.S. from China. BorgWarner Inc. remains firmly stuck in
bear-market territory and is down 13% so far this year. This month,
the auto-parts supplier cut its earnings and sales outlooks for the
year, citing weaker industry volumes in China, as well as
"short-term issues" in Europe.
Shares of several tech manufacturers also have been crushed by
tariffs on Chinese imports. Chip-equipment maker Applied Materials
Inc. -- which said the Trump administration's tariffs will result
in "unnecessary costs" that cause "economic harm" at a
congressional hearing in July -- has seen its stock slide 37% from
its March high. Lam Research Corp. and Western Digital Corp. shares
have fallen more than 30% each from their trailing-year highs.
To be sure, some of the stocks that have fallen into bear-market
territory, like bricks-and-mortar retailers, have struggled because
of industrywide pressures -- things that have had little to do with
trade. General Mills Inc., down 27% from its trailing year high,
has struggled to reverse stagnating sales as consumers have
abandoned its snacks and yogurt offerings for brands offering
healthier alternatives. J.M. Smucker Co. has faced similar
pressures; its shares fell as low as 23% from their 52-week highs
and remain down 17%.
Still, even with dozens of stocks struggling to break out of
bear-market territory, the U.S. stock market remains well above its
peers.
Hong Kong's Hang Seng Index fell into bear-market territory
earlier this month and remains down 8.1% for the year, with trade
concerns and a stronger U.S. dollar hurting the index and other
developing economies. China's benchmark Shanghai Composite and
MSCI's flagship emerging-markets index both have suffered drawdowns
of more than 20% from recent highs.
One reason why the U.S. stock market has been able to keep
driving higher is that investors have bet on a handful of dominant
technology companies weathering the fallout from tighter trade
policies.
Shares of Apple Inc. and Amazon.com Inc. are responsible for
nearly 30% of the S&P 500's 9.2% gain so far this year,
according to S&P Dow Jones Indices.
However, analysts caution that while investors have been pricing
the risk of a trade war into shares of manufacturers, mining firms,
home builders and others, they mostly have ignored the glaring
risks associated with major tech companies, such as potential
punitive measures that could affect Apple's manufacturing in China
or cost increases that could hurt Amazon's e-commerce sales. That
puts the S&P 500's narrow leadership at risk of a sharp
pullback if trade tensions reach a boiling point, similar to the
swift correction that stocks suffered in February on worries about
a potential pickup in inflation.
Those companies have already showed some signs of stress in
recent sessions due to concerns of new government regulation and
the potential impact protectionist policies could have on tech
manufacturers. Tech stocks in the S&P 500 are down 0.9% in
September, on pace for their biggest monthly loss since March.
Apple is "the No. 1 company exposed to trade," said Michael
O'Rourke, chief market strategist for JonesTrading LLC. "Until
people see the definite negative out there, people will ride this
market out as long as they can. That's representative of a very
large problem."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com and
Akane Otani at akane.otani@wsj.com
(END) Dow Jones Newswires
September 24, 2018 18:17 ET (22:17 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.