Shares of Littelfuse (LFUS -0.22%), LyondellBasell (LYB 0.31%), and MKS Instruments (MKSI 0.70%) rose 13.6%, 15.6%, and 17.9%, respectively, in September, according to data provided by S&P Global Market Intelligence. All three handily outperformed the S&P 500, which only rose 1.72% for the month.
Although shares of controls and instruments manufacturer MKS are now way up for the year -- 40.9% so far in 2019 -- the other stocks have lagged. Electrical components manufacturer Littelfuse's shares have only risen 2.6% for the year, while shares of chemical maker LyondellBasell are only up 0.9%, badly trailing the market.
All three companies seem to have benefited from a perceived easing of trade tensions between the U.S. and China. On Sept. 4, multiple news outlets reported that senior officials from the two countries would meet this month to try to resolve the ongoing trade war. Deputy-level talks were scheduled to precede the meeting. This cheered investors, but particularly investors in companies that had been hit hard by the ongoing stalemate. Littelfuse, LyondellBasell, and MKS were three such companies.
In its Q2 earnings call, LyondellBasell reported that margins in Asia were down to four-year lows. In response to a question about those margins, CEO Bhavesh Patel lamented that "buying patterns are more dynamic now than they were before, because of the trade news, and the tariffs, and so on."
Similarly, on his company's Q2 earnings call, MKS CEO Gerald Colella blamed the trade war for headwinds in the company's key Advanced Markets segment: "This is primarily due to disruption of the global trade environment highlighted by softening in consumer electronic devices, tariffs, and the Huawei ban. We see the impact both directly in China and indirectly across other regions as this uncertainty continues to be an overhang in many of our markets and for our customers worldwide."
For its part, Littelfuse cited a number of issues surrounding China in its Q2 earnings call, including a slowing of the auto market, and increased Chinese competition in the sensor industry. In particular, CEO David Heinzmann expressed concern that local Chinese competitors were now able to undercut Littelfuse on price, to the point that the company's margins were no longer attractive.
With Chinese woes at the forefront, it's no wonder that any positive news about trade tensions had an outsize effect on these three stocks:
It's always tough to know how to respond when a stock moves not on the basis of an actual event or development, but on the promise of a future event or development. Obviously, the news that the U.S. and China would hold talks a month later falls into the latter category.
The actual effects of the talks, which resumed on Oct. 10 for the first time since July, won't be clear until the announcement of some sort of deal...or the announcement that the talks have broken down without a deal. Business groups hope that, at the very least, the talks could delay the next round of tariff hikes, which are scheduled to take effect later in October.
As for the three companies, like everyone else, they're in limbo. If a deal is reached, their stocks will almost certainly rise (along with the broader market). If no deal is reached, they will likely drop (again, along with the broader market). If there's some sort of delay or if the sides agree to "keep talking," things could stay pretty much the same.
These types of market moves based on potential resolutions to the trade war -- now in its 15th month -- have happened before, and so far, they've all been premature. There's no real reason to believe that the current situation is any different. Therefore, investors shouldn't change their thesis for or against these stocks based on this market move.