(New York)

2016 was an extraordinary year for small cap stocks. They started the year down as much as 26% from their 2015 highs, only to see a huge rebound and big capital inflows, especially into small cap banks after Trump’s election. They exploded for a 21.3% total return for the year, outperforming their larger cap rivals after long-term underperformance. Now the question for investors is whether it is too late to get in. Some analysts think it is a growing trend, but others fear it is a short-term frenzy with valuations too high. One analyst from BAML summarized the situation this way, saying “You want to be more cautious than usual; the bull case for small stocks is very much based on sentiment”. One of the other big worries is that Fed starts a heavy tightening cycle just as small caps having started seeing rich valuations.

FINSUM: In our view, the future of this rally depends on Trump, as less regulation of banks and the prospect of heavy trade tariffs has driven it. If he delivers, the rally will likely continue.

Source: Wall Street Journal

(New York)

Trump has made a lot of noise with his planned trade tariffs—ask Ford and Toyota, and so far it appears to have helped keep jobs in the US. It will also have a huge impact on some very big stocks. This Wall Street Journal article presents in a great chart how some large stocks will be wounded, or gain, from Trump’s proposed changes. The retail sector will be particularly affected and some of the big names to watch are Walmart, Costco, and Best Buy, which will lose big, and Home Depot, which would gain. To give an idea of the size of the bills big retailers (six of them) would face, their tax liabilities would more than double, rising from around $13 bn to $28 bn.

FINSUM: This is a major issue for some of these businesses. Take a look at Best Buy on the chart in this piece, its net income would fall from positive $1 bn to negative $2.1 bn

Source: Wall Street Journal

(Washington)

Famed economist Joseph Stiglitz has just gone on the record giving Donald Trump and “F” in economics. Stiglitz, who is a professor at Columbia University in New York, lambasted Trump on his economic plans, specifically in regards to his plans towards China. Stiglitz says that if Trump puts new tariffs on goods from China it will spark a trade war, which will cause a correction in US living standards and a net loss in US jobs. Stiglitz was chairman of the Council of Economic Advisers from 1995 to 1997, meaning he was a member of president Clinton’s cabinet. When asked about what grade he would give Trump in Economics, Stiglitz replied “F. He just doesn’t understand much about economics”.

FINSUM: Trump is proposing some very radical economic ideas, so it is no surprise the establishment does not agree. However, this piece is useful because it explores the possible consequences of such new policies.

Source: Bloomberg

(Beijing)

After an arduous two-year court battle, the World Trade Organization has ruled decisively in favour of China over a number of trade disputes between Washington and Beijing. China has complained bitterly about high tariffs imposed by the US on Chinese goods, particularly in the solar and steel industries. The US imposed the tariffs as a way to offset “overt” and “hidden” subsidies which made Chinese costs distortingly low and put US companies out of business. Now, in considering the case, the WTO has ruled that the US’ tariffs were inappropriate because they do not accept the US’ argument that the subsidies given to Chinese companies make them “public bodies”, an important but narrowly defined term in the WTO’s eyes. China says is hopes the US will abide by the ruling and abolish its punitive tariffs. The US also lost a similar case with concern to India, where the US used the same argument about the Indian steel industry.

FINSUM: The US has now lost a ferocious trade battle just at a time when the US and China are meeting to discuss future relations. Will Washington give in and abolish the tariffs, potentially wiping out the thriving domestic solar industry, or will it defy the WTO?

(Washington)

In a move that has infuriated China, the US government has decided to extend and raise tariffs on Chinese solar equipment, with some rates reaching as high as 35.2%. The government raised the tariffs after receiving a complaint from a domestic manufacturer that Chinese makers were finding ways to skirt the current import regime through complex offshore manufacturing arrangements which circumvented the rules through a technicality. However, the new tariffs will be more comprehensive, and are being seen as a move to protect the US’ domestic solar industry. China has reacted strongly, saying the US move smacks of protectionism, and that the tariff “would not solve the development problems of the US solar industry”. Domestic manufacturers have called the tariffs “a strong win for the US solar industry”, but even some in the US say it will hurt the sector, as the raised costs come at a time when solar was just starting to compete with fossil fuels in price.

FINSUM: The cold war of trade is heating up between the US and China, as the two countries battle each other economically on many fronts. The move will certainly protect US manufacturing, but it is a legitimate concern that it may hurt growth in the solar market by raising costs versus other energy alternatives.