How stocks would benefit if China, Russia and Fed obstacles to the market were removed

Published Thu, Jun 23 20221:18 PM EDTUpdated Thu, Jun 23 20221:20 PM EDT

There are three major factors contributing to one of the most confounding markets in decades. Any one of the three would have been enough to make a dent in stocks. But all three happening at the time has been a bridge too far. Investing Club members know these factors well from reading our trade alerts and market analysis. China's rolling lockdowns and forced mass testing in its ill-advised pursuit of zero Covid Russia's unprovoked invasion of Ukraine The Federal Reserve's game of catch-up to thwart raging inflation and the possibility of a recession We've said that a resolution of two or even one of these might be enough to stabilize markets and stop the week-after-week of selling that's caused a bear market in the S & P 500 , the first since February 2020 in the early days of Covid and the one before that bookended the 2008 financial crisis. Instead of the glass half-empty or drained all together view, we wanted to be optimistic and look at how stocks in Jim Cramer's Charitable Trust , the stock portfolio we use for the Club, would benefit from resolutions in each of the three factors holding back the market. Fully re-opened China? What if China decided to move away from its zero-Covid policy and embraced the mRNA vaccines from Moderna or Pfizer that have been widely used with success in the U.S. and around the world? A China without a risk of future shutdowns would be highly beneficial to so many companies in the portfolio. The obvious winners would be semiconductors stocks — Nvidia (NVDA), Advanced Micro Devices (AMD), Qualcomm (QCOM), and Marvell Technology (MRVL) — because China is such a large and important market for all of them. Outside of semis, the end of lockdowns would be positive for Apple (AAPL) from a demand and supply perspective. Danaher (DHR) does a lot of business in the region. Disney (DIS) has its Shanghai Disney theme park and movie theater business. Procter & Gamble (PG) could benefit because China is its second largest market. No more Covid-related travel restrictions in China and Macau, a Chinese special administrative region, would mean Wynn Resorts (WYNN) would finally see a durable recovery in its casino operations. From a supply chain perspective, companies like Cisco Systems (CISCO) would have less trouble sourcing the critical components it needs to ship products to customers. It's not just the tech supply chain. Retailers bring in a huge amount of goods from China so companies like Amazon (AMZN), Walmart (WMT), and Costco (COST) should benefit, too. Lastly, a China that's open — and open for good — would increase the global demand for energy, meaning higher prices, which are good for all the energy stocks in our portfolio. Our big five are Coterra Energy (CTRA), Chevron (CVX), Devon Energy (DVN), Halliburton (HAL) and Pioneer Natural Resources (PXD). Russia-Ukraine stop fighting? Here's how we see it if there were a peaceful resolution in Russia's war against Ukraine. There are numerous economic and humanitarian reasons to hope for peace, but it won't all be positive for stocks. Energy-related companies would likely see a significant decline the day any resolution is announced. Just a ceasefire, not full peace, however, would not solve the tightness in the global energy market and the economic sanctions put on Russia probably won't get lifted. Embedded in the elevated price of oil is geopolitical risk, and energy markets would need to price this risk out if there is peace. Now the winners: You could come up with a long list here because a decline in energy prices will positively impact so many different industries and businesses. It would be great for almost the entire market. A significant drop in oil will also help the Federal Reserve in its own battle against inflation. Some other areas we are thinking about are the semiconductor stocks. This has less to do about the demand side of the equation and more about supply. Neon gas is an essential input in the semiconductor manufacturing process and a lot is sourced in Russia and Ukraine. Operations in the two countries were halted when the war first broke out. Let's not forget about what peace means for economic activity in Europe. Our stock with the most exposure to industrial activity in the region is Linde (LIN). Not only would Linde probably see its volumes push higher as industrial activity reaccelerates, but the decline in energy costs would be viewed positively for the industrial gas giant as well, even though the company has shown time and time again an ability to protect profits in the face of higher costs. Fed pulls off soft landing? Last but not least, what if the Fed were to pull it off — a so-called soft landing where inflation is reigned in without a material increase in the unemployment or decline in gross domestic product? Not to sound glib, but all stocks should do well if this happens because of how bad the market has been this year. You may have heard some market commentators say the market is already "pricing in" a recession, meaning the price-to-earnings multiples have come down enough to reflect a downturn. If that downturn isn't as bad as expected, then it could mean earnings estimates and multiples go higher. While an everything-rally could be in the cards if a soft landing happens, we think it's important to separate groups that would be relative winners and losers. Perhaps the biggest winners of a soft landing would be the financials — and, more specifically, the big banks because they will get the benefit of higher interest rates without the credit risks of a recession. This plays directly into Club names Wells Fargo (WFC) and Morgan Stanley 's (MS) hand. The relative losers? In this scenario, it would not surprise us to see some of the more defensive areas like the consumer staples trade higher yet underperform the gains of the rest of the market. Sure, P & G's inflationary pressures will come down too, and it is less likely that consumers trade-down household products. Their earnings estimates will be revised higher, too. However, the staples are set up as a relative loser because an economy in a healthy expansion mode would favor stocks with more economic sensitivity. (Jim Cramer's Charitable Trust is long NVDA, AMD, QCOM, MRVL, APPL, DHR, DIS, PG, WYNN, CSCO, AMZN, WMT, COST, CTRA, DVN, HAL, PXD, LIN, WFC and MS. See here for a full list of the stocks.) As a