NAFTA’s done. Kaput. No more.

In its place is the United States-Mexico-Canada Agreement (USMCA). That’s what President Trump announced in a congratulatory tweet on Monday:

After a year of imposing tariffs on America’s neighbors to the north and south, President Trump finally got a deal done to replace the North American Free Trade Agreement (NAFTA)… right before his September 30 deadline.

The leaders of Canada, Mexico, and the United States still need to iron out all the details. And lawmakers in each country must approve the agreement. 

But it looks like Trump will get some type of deal done. (Trump’s U.S. trade representative expects the agreement to pass the U.S. Congress “with a substantial majority.”)

We don’t know all the ins and outs of the deal yet. But we do know this… It confirms our Trump Trade War Theory (see here and here).

In July 2018, I told you that President Trump’s master plan is to get trade deals in place before the November midterm elections. As I laid out then, Trump’s goal is to help Republicans retain their majority in Congress:

As the midterm elections approach, he’ll start toning down his rhetoric and signing new trade deals with China, Canada, Mexico, and the European Union.

Once he does that, the market will rejoice… It’ll be off to the races.

I’m looking for him to strike some deals starting in late August or early September. Those deals should set off a market rally for the ages.

Now, even if the market continues to rally, voters may choose not to stick with the GOP. So this plan may or may not help Republicans retain control of Congress…

But as regular readers know, we don’t do politics. We look for money-making opportunities. And this deal is good news for the markets… which means it’s good news for investors, too—no matter what side of the aisle you come down on.

Today, I’ll tell you how we’ll reposition ourselves to take advantage of this new agreement. But first…

What’s in the New Deal

Many of the changes in the renegotiated deal are cosmetic. In other words, they won’t differ much from NAFTA. But if enacted, USMCA will make two major changes that benefit the United States…

  • It will open some of Canada’s dairy market to U.S. farmers.

Under NAFTA, Canada limited how much milk, cheese, and other dairy products could come in from the U.S. Under the new agreement, Canada will set new quotas. It will increase market access for U.S. dairy products, poultry, and eggs. In return, the U.S. will allow more Canadian dairy products, peanuts and peanut products, and a limited amount of sugar to cross the border.

  • It will require more vehicle parts to be made in North America.

The new deal requires that 75% of auto parts be made in Canada, Mexico, or the U.S. That’s about 12 percentage points higher than under NAFTA. The provision will help keep the production of car parts in the U.S. and bring back some of the production that moved abroad.

The bottom line is this, though…

Regardless of what’s in the agreement, the market is just happy that Trump got a deal done. And that means more profits for certain sectors.

How to Position Yourself

I predicted that the market would rally when trade tensions started to die down. And we’re seeing just that.

The market responded with its best quarter since 2013. The S&P 500 was up 7% in the third quarter of 2018—largely due to reduced trade war fears.

So how do we play this?

In July, other analysts were telling investors to take cover in the small-cap iShares Russell 2000 ETF (IWM). Since small caps do most of their business at home, they’re less affected by tariffs.

But here’s the thing: All those guys were a year too late. We already told you to hide out in small caps back in 2017, while trade tensions played out.

That’s why I told you now was the time to switch to multinationals—especially those in industrials and commodities. These are large companies that will benefit from the removal of trade barriers and tariffs.

Industrials and consumer staples have a great deal of international exposure. Here’s how they’ve performed since June…

Both sectors are crushing the Russell 2000. And they’ll continue to do so if countries continue to rescind their tariffs.

I think we’ll see President Trump sign more deals soon, perhaps with Japan and India. Both countries seem willing to work with the Trump administration on trade.

And the way to play these defusing trade fears is to consider the Industrial Select Sector SPDR ETF (XLI) and the Consumer Staples Select Sector SPDR ETF (XLP).

Regards,

Nick Rokke
Analyst, The Palm Beach Daily

P.S. Have you followed President Trump’s tweets to profits? Do you think his policies are good for investors? Let us know right here…

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