Just when it appeared progress was being made on the trade front, the White House is considering avenues for limiting U.S. investors’ exposure to Chinese investments. Believe it or not, those limitations would include the potential delisting of Chinese companies trading on major U.S. exchanges.
Yes, that would mean no more Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU) or JD.com (NASDAQ:JD) trading in the U.S. Not surprisingly, those stocks suffered big losses Friday, with Alibaba and JD.com each shedding more than 5%.
Assuming this move becomes a reality, it would be problematic for plenty of popular passive investments, including exchange-traded funds (ETFs). Widely followed benchmarks, such as the MSCI Emerging Markets Index and the Bloomberg Barclays Global Aggregate Bond Index have been boosting exposure to Chinese assets this year.
Preventing or encumbering access to investments outside of a particular country is a tactic employed by some other countries, but not a ploy that jibes with many Americans’ view of free markets. The idea drew quick and harsh criticism with portfolio manager interviewed by Bloomberg calling it “ludicrous.”
With trade concerns reemerging, the Nasdaq Composite slumped 1.13% while the S&P 500 lost 0.53%. The Dow Jones Industrial Average finished the week lower by 0.25%. In late trading, 24 of the Dow’s 30 stocks were lower, one of the worst ratios in some time. Of the scant group of Dow winners today, just one — Pfizer (NYSE:PFE) — was higher by close to 1%.
Usual Suspects
With trade tensions again commanding center stage, it was not surprising to see some of the most trade-sensitive names suffering today. The Dow Jones Industrial Average is home to five stocks from the technology sector, each of which closed lower today, led by an almost 2% decline by Microsoft (NASDAQ:MSFT).
Apple (NASDAQ:AAPL) joined that dubious party, shedding almost 1%. Of the 11 sectors represented in the S&P 500, technology is one of the most export-dependent, meaning that if China decides to fire back at the White House over the delisting gambit, the likes of Apple, Microsoft and Intel (NASDAQ:INTC), another Dow Jones loser today, will suffer.
Today’s tech price action hammers home that point, because without today’s White House headlines, there was no company-specific news to really hurt the Dow Jones today.
More Boeing
For investors looking to rationalize some of the Dow Jones losers today at the company-specific level, there is Boeing (NYSE:BA). Shares of the aerospace and defense company lost more than 1% today on news that CEO Dennis Muilenburg will testify before Congress regarding the two fatal 737 MAX crashes. The hearing is slated for Oct. 30.
“The House Transportation and Infrastructure Committee, which has been conducting an investigation into the 737 Max, announced on Friday Muilenburg will appear along with John Hamilton, the company’s chief engineer for its Commercial Airplanes division, and Jennifer Henderson, the chief 737 pilot,” according to Bloomberg.
In better news, Buckingham Research analyst Richard Safran said in a note out today that Boeing shares could fly back to $450 if the company can get the 737 MAX back in the skies soon.
Mouse Mauled
Showing the severity of the China delisting headlines, shares of Walt Disney (NYSE:DIS) fell about 1.6%, making the stock the second-worst performer in the Dow Jones Industrial Average behind Microsoft after the company said it reached an agreement with Sony to allow Spider-Man to remain part of the Marvel franchise of films.
Spider-Man “is “the only hero with the superpower to cross cinematic universes, so as Sony continues to develop their own Spidey-verse you never know what surprises the future might hold,” according to Marvel Studios President Kevin Feige.
Bottom Line
On a standalone basis, a proposal to delist Chinese companies from U.S. exchanges is risky, but it comes against a fragile earnings backdrop. That’s notable because we’re cruising toward third-quarter earnings season next month.
“Heading into the end of the third quarter, 113 S&P 500 companies have issued EPS guidance for the quarter,” according to FactSet data. “Of these 113 companies, 82 have issued negative EPS guidance and 31 companies have issued positive EPS guidance. The number of companies issuing negative EPS for Q3 is well above the 5-year average of 74.”
As of this writing, Todd Shriber does not own any of the aforementioned securities.