Stock Market

What Huawei CFO Meng Wanzhou’s Arrest Means for the Stock Market – Barron's


A Huawei store in Beijing.

Photograph by Wang Zhao/AFP/Getty Images

Trading this week has been about as brutal as we can remember in a long time. It began with a nice bounce on Monday following a trade war “truce” between the U.S. and China. But that proved to be just a head fake, as stocks have tumbled, and tumbled hard, starting Tuesday.

The
Dow Jones Industrial Average,
the
S&P 500,
and the
Nasdaq
all opened with sharp losses on Thursday. The Dow and the S&P 500 both regained ground to finish with narrow losses, while the Nasdaq finished slightly in the green.

The massive drop in the Dow on Thursday morning was spurred by the arrest of Huawei CFO Meng Wanzhou in Canada, at the request of the U.S., for allegedly violating sanctions against Iran. And it was a confirmation of what we have said for a long time: The tensions between the U.S. and China are about more than trade, and the problems won’t be solved any time soon.

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Huawei Technologies, remember, is not just any Chinese company. It makes cell phones and other tech products, which are used in a wide range of products in the U.S. and Europe. Huawei is also seen by some observers as instrumental in helping China’s government attain its long-term goals. Recently, it became the world’s second-largest cell-phone maker by market share.

So the arrest of its CFO isn’t just any arrest, said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Imagine for a second that the Chinese government arrested the CFO of
Apple

and extradited him,” Boockvar wrote in a note Thursday. “While it’s not the case, also imagine if the CFO was the child of Steve Jobs. I’ll leave my comments at that.”

Keep in mind, however, that these moves are coming on the heels of the best week for the S&P 500 since 2011. That tells us that as scary as these swings are, a one-day move says more about stock-market volatility and less about where the indexes are heading overall. Yardeni Research’s Ed Yardeni noted that there have been a number of these one-day meltdowns, and he believes they are the result of algorithmic trading that dominates markets these days.

As Washington-Beijing relations teeter, Chinese tech titan Huawei’s chief financial officer has been arrested in Canada and faces extradition to the U.S. But Meng Wanzhou, aka Sabrina Meng, isn’t your garden-variety executive; she’s the company founder’s daughter. Photo: EPA

“The ‘algos’ seem to have been triggered to sell by news events suggesting escalating trade wars and flattening yield curves,” Yardeni wrote in a note Thursday. “So far this year, the market action suggests that shortly after algo-meltdown days, humans emerge from behind the rocks and start buying stocks that now look especially cheap. We expect they will be doing so again in coming days.”

But maybe not just yet. Evercore ISI’s Dennis DeBusschere argued that the combination of low unemployment, the slowing pace of economic growth, and continued trade tensions mean investors won’t pay as much for company earnings. The same goes for quantitative tightening and deleveraging in China.

“Despite a significant PE contraction, S&P valuations do not provide a meaningfully support,” he wrote in a note, adding that current data suggests 3.4% downside from the S&P 500’s level on Thursday morning.

Still, the selling is starting to look extreme. Jason Goepfert, president of Sundial Capital Research, noted that there have been just eight occasions in which the S&P 500 has opened sharply lower the day after a drop of 2% or more while still within 10% of its all-time high—and the short-term outlook has generally been quite good in these instances.

The S&P 500 has been higher 88% of the time following such occasions, with an average gain of 11%. “Based purely on typical behavior following knee-jerk selling pressure after large losses, the early morning sales appear overdone and likely to reverse in the days ahead, except for the rare case of a crash, which is never a good bet,” he writes.

So what can investors do? Fundstat’s Tom Lee points them to so-called quality-value stocks—cheap stocks that have low debt and strong businesses. Such companies include
Home Depot

(HD),
3M

(MMM),
Microsoft

(MSFT), and
ExxonMobil

(XOM).

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We’d add low volatility strategies like those used by the
Invesco S&P 500 Low Volatility
ETF (SPLV) or
iShares Edge MSCI Min Vol USA
ETF (USMV) to the list, as well. Both are still up this year, even though they’ve been hit hard this week.

But the best choice might just be a little more cash. Cash will soon yield more than stocks, as the one-year Treasury yield has risen to 2.7%. That doesn’t mean selling all your stocks—they tend to go up over time, remember—but it could be a place to stash money if your asset allocation is overweight equities.

If nothing else, you’ll sleep better at night,

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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