Investors are currently worried about the trade war between China and the US. Tensions have reached a new peak this week after threats from President Trump regarding hiking the tariff rate to 25%. This big development, and the trade war generally, prompted JP Morgan CEO Jamie Dimon to weigh in this week. “The odds of something bad happening [in trade negotiations] is now double. Whatever you thought they were — 2%, 5%, 10% is probably doubled. That’s why the market is reacting to it because they’re not just afraid of the direct effect, they’re afraid if it reverses global trade, it reverses global growth and hurts trade around the world”. All that said, he sees an 80% likelihood a deal will occur because smart people on both sides will make it happen.
FINSUM: We agree with Jamie. Both sides have a lot on the line and we think everyone will eager to seal a deal, even if a modest one, and move on. Perhaps that is western-centric thinking though.
Investors are always looking for good yields. While bonds are seeing higher yields now, high paying stocks offer something special because of the chance of capital appreciation. Such investors might be tempted by financial stocks right now, which are sporting juicy yields. However, Goldman Sachs is warning that investors need to beware. JP Morgan and other banks have been beaten up over the last year and are sporting payouts of above 3% in some cases. However, the big risk that is financial stocks are highly rate sensitive and tend to lose value as rates fall because of their lower profitability in such times. This pushes up dividends, but moves prices lower.
FINSUM: If you think we are even close to heading into a recession, buying financials is not a good idea. If you think this is a false signal, then banks may be a great buying opportunity right now.