By Felice Maranz and Bloomberg
February 4, 2019

Clues on trade policy are likely to be top of mind for stocks investors watching President Trump’s State of the Union speech Tuesday. Trade remarks may influence equity sectors from footwear to auto parts, while pharma stocks may be volatile if the president zeros in on drug costs reforms, and financials and housing may be overlooked.

Trump is expected to reference a few areas “where both parties can agree” — including prescription drug prices and infrastructure plans — “but it is difficult to imagine the rhetoric turning into reality when Washington has struggled to keep the lights on,” Compass Point’s Isaac Boltansky tells Bloomberg. Boltansky expects the speech to focus on “economic growth, immigration, a few bipartisan mirages and the wall.” Still, this year’s speech may mean less for investors than it has in prior years, as the State of the Union has become “more pomp than policy,” he said.

Trump is likely to “focus on his ‘Promises Made, Promises Kept’ mantra to ensure that the ‘America First’ base of supporters turns out again in force,” Beacon Policy Advisors wrote in a note. “As such, executive actions restricting immigration, lowering drug prices, implementing trade restrictions, and other foreign policy initiatives will be front and center.”

Here’s what to watch:

Trade

“Next steps with China” are the most important trade point, Height Capital Markets’s Clayton Allen tells Bloomberg. He expects Trump will “aggressively claim concessions from the Chinese,” while discussions with the European Union are a “dark horse,” as “everyone seems to have let this go to the back burner, but there is still a lot of potential tension.” Allen also expects additional threats to pull out of Nafta in an attempt to force Congressional support for the USMCA, and “aggressive rhetoric around Venezuela, but no announcement of additional actions.”

Trade is likely to occupy “a substantial portion” of the speech, as legislative action from Congress during the next two years is unlikely, so Trump needs to prioritize “areas where he can enact change unilaterally,” Veda Partners director of economic policy research Henrietta Treyz says. She expects Trump to “leave the door open for further tariffs … but message that progress is being made.”

It’s also possible Trump may focus on the USMCA in a bid to be “flashy,” and “attract headlines” that would trigger the “combustible momentum you’d need to get action from the House or Senate before July 2019,” Treyz said. The president may also indicate his willingness to impose tariffs on foreign automobile imports in an effort to “shore up the automobile industry to protect our national security.”

Much like Trump’s trade agenda, “the speech will likely flow between the two poles that anchor the Administration’s macro trade policy: Tariff Man vs. Art of the Deal,” Cowen’s Chris Krueger wrote in a note. “We will be listening closely for any discussion of the biggest trade variable: auto and auto parts tariffs.”

If Trump mentions Nafta, automakers and parts suppliers will be the names to watch: General Motors, Ford, and Dorman Products, Visteon Corp., Delphi Technologies, American Axle & Manufacturing, Standard Motor Products, Aptiv Plc and Cooper-Standard. Regarding relations with China, keep an eye on industrial companies Caterpillar Inc. and Boeing Co.

Commodity investors may find comments on trade talks with China of particular interest, as industrial metals, such as copper, have been whipsawed by concerns over demand from China as the trade war stings. They’ll be looking for hints ahead of Trump’s March 1 “hard deadline” in trade negotiations, and China’s Vice Premier Liu He’s upcoming Washington meetings.

Retail

If Trump can assure the U.S. and China are moving closer to a trade deal, “apparel and footwear companies will rally” as the probability of tariffs on finished goods eases, Bloomberg Intelligence’s Chen Grazutis said. That might also mean China’s economy will return to faster growth, “a positive for global brands that are counting on sales there.”

Companies including Nike Inc., Under Armour Inc., Canada Goose Holdings, VF Corp., Abercrombie & Fitch, Gap Inc., Ralph Lauren Corp., and PVH Corp. are a few apparel and footwear stocks with tariff exposure or that seek to expand in China.

Infrastructure

This will be a big area to watch as Trump is said to make a renewed push for spending in the sector, widely seen as a rare spot of bipartisanship in Washington. While the topic had been sidelined amid raging debates over tax reform and immigration, many experts see a plan making some inroads this year. Stocks to watch include Eagle Materials, Martin Marietta Materials, Emerson Electric, Eaton, Masco, Vulcan Materials, as well as railroad and airline companies.

Capital Alpha Partners’ Byron Callan said the address is an opportunity to highlight infrastructure as something to get done in 2019 after two years of little or no progress.

Health Care

Trump is likely to tout his administration’s long-awaited proposal to end a complex system of drug rebates that’s been blamed for helping keep prices high. The measure, announced on Thursday, could hand the president a potential win on drug pricing if passed.

Besides directly targeting middlemen like pharmacy benefit managers, the policy is a “clear negative” for makers of expensive drugs that use rebates to fend off competition from cheaper alternatives, said Veda Partners analyst Spencer Perlman. Sell-side analysts at Wall Street firms had mixed reactions as health-care supply chain stocks fell on Friday.

Read More: Drug Supply Chain Falls as Some on Wall Street Say Shake It Off

Defense

“Trump’s defense spending priorities will be interesting to watch because we’re still really trying to gauge where he stands,” James Bach, Bloomberg Intelligence government analyst said. In general, “Trump has overseen some pretty significant increases in discretionary appropriations. There hasn’t been a lot of noise around cutting spending as of late, so it would be notable if he does bring this up.”

Stocks to watch include Lockheed Martin Corp., Raytheon Co., Northrop Grumman Corp., General Dynamics Corp. and Boeing.

Energy

Trump may flag sanctions on Venezuela’s state-owned oil company PDVSA that effectively block the nation from exporting crude to the U.S. That’s left U.S.-based refiners including Valero Energy Corp. searching for alternative sources of heavy crude oil. Goldman Sachs recently noted Valero, Citgo, PBF Energy Inc. and Marathon Petroleum Corp. are the main U.S. refiners exposed to Venezuelan crude imports.

Financials

“We’re not expecting President Trump to really focus or provide new views for the financial sector,” Bloomberg Intelligence’s Nathan Dean said. Trump is likely to “be content to let regulators continue their path towards regional bank de-regulation.”

Housing, Housing Finance

Housing probably won’t be “one of Trump’s hottest topics” during the speech, Bloomberg Intelligence’s Ben Elliott said. “If it gets a mention, it’ll probably be indirect or will just be a few seconds.” Even though housing finance reform and plans for Fannie Mae and Freddie Mac have been under scrutiny lately, the president is unlikely to extensively discuss them, Elliott added.

There’s a chance Trump “mentions the administration’s intent to end the conservatorship of the government-sponsored enterprises (GSEs) but we think any comments will probably just be in passing and lack specificity about the administration’s plan,” KBW’s Brian Gardner wrote in a note.

The Wall/Shutdown Concern

Height Capital Markets’s Allen will also be watching for how much Trump emphasizes “other ways to get his wall” as another “shutdown seems like it hinges on an emergency declaration.”

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