If you’re (justifiably) concerned that President-elect Donald Trump’s protectionist trade policies could hurt the retail stocks you own, here’s the deal. Investors who own companies selling highly-disposable, high frequency, low ticket items, should seriously consider selling those stocks.
Trump has proposed a tariff on Chinese goods of up to 45%. Of course, the likelihood of something this extreme being passed is low.
However, with the nomination of known China basher Peter Navarro as head of the White House National Trade Council, some insular trade policy looks increasingly likely. Upon naming Navarro to this White House Council in December, retail stocks fell almost -5% in the ensuing days.
Why?
History suggests that protectionist policies would be very bearish for weak brands like Kohl’s (KSS) and JCPenney (JCP). Hedgeye Retail analyst Brian McGough says, in the video above, more expensive, durable goods, like cars and washing machines, will be most safe from any tariff-related pullback in consumer spending.
“If you sell automobiles or auto parts even furniture you’re probably going to be ok. You have a replacement cycle of five or six plus years. Are you not going to buy a car from Germany or Japan because import duties went up? Probably not. But are you going to buy as many GAP jeans, if anyone buys GAP jeans anymore? No, probably not.”
HERE’S THE BREAKDOWN
Biggest Risk:
- High Frequency
- Highly Disposable
- Low Ticket
Lowest Risk:
- High Ticket
- Low Frequency
- Long Replacement Cycle
- Housing-Linked
The probability isn’t zero that these measures get passed, McGough says.
Here’s how the general legislative timeline for Trump’s trade policy agenda shakes out. The House would take up a bill in late Spring. There, it’s likely to be passed. In early Summer, the Senate would then introduce the bill for consideration. It’s less likely to pass in the Senate, but assuming it does, it would be implemented in 2018.
If it passes, it could get ugly in retail. Just something to think about.
