2nd Quarter 2019 Commentary

The “News” Cycle Has Compressed To 10 Seconds – The Time It Takes To Read A Tweet. 

Trump (45) has finally figured out a way to keep the eyes and ears of the financial press (and the fears and dreams of the public) with him at all times. 

How you ask? 

Through tweet storms about trade. 

45 escalated the tariff row with China in a tweet storm on Sept. 17, 2018. The market sell-off started and ended in almost-bear territory (down 19.8%) on Dec. 24 as cooler heads prevailed. The Fed hiked one last time in 2018, sounding a dovish tone for 2019. 

Signs (read: tweets and commentary) pointed to good work being done on the trade front. The Fed said they were ready to be as accommodating as necessary given ongoing trade issues. Markets then rallied to new highs by late April.

The fourth quarter decline was largely headline driven. Tariffs equaled economic slowdown; this thing is long-in-the-tooth anyway; therefore recession was near. None of the data supported the conclusion, so as new data arrived and headlines changed… Poof, recovery!

May and June gave us a mini-repeat of the Q4-Q1 swoon and recovery. 

On May 5, 45 tweeted about tariff disputes with China and now Mexico. As a result, markets turned down – May’s decline was a run-of-the-mill 6(ish)%. In early June he claimed a resolution to the Mexico tariff. June’s advance was a smidge over 7%.

45’s tariff talk creates headlines, and headlines move markets… in the short term. However, we own businesses. And the long-term success of business will forever be driven by each company’s ability to grow revenues and profits. 

Each new tariff tweet has created negative volatility. Each successful negotiation tweet has created positive volatility. But, this is all short-term noise. 

Yes, freer trade would be better for us (in terms of prices on what we buy), but in the long term, companies will continue to compete on price – even if that means re-thinking their international suppliers. 

For example, Foxconn (a Taiwanese firm) is begging Apple to move manufacturing out of Foxconn’s Chinese factories and into other Foxconn factories (maybe Taiwan; maybe Wisconsin). Companies deal with changing international trade dynamics all the time.

The constant noise buys airtime. The primary effect is 45 gets eyes on him. 

We have to look at data to know what’s really going on. The economy is still good, though slightly less good than it was. (The narrative that the US is teetering on the brink of recession is just silly.)

Q1 GDP was revised to 3.1%, and Q2 is likely to come down to the 1.5-2% range. The expectation is still for 2019’s GDP to be in the 2-2.5% range. Fundamentals (such as jobs, inflation, productivity, valuations, and Fed Policy) continue to support moderate economic growth.

Unemployment is at 3.7% (an incredibly low number). Yes, May’s employment report was scary, but some short-term blips are to be expected because the data comes from a survey.  (We’ve had 5 or 6 really low months scattered throughout the last decade.)

The June report was business as usual – 224,000 net new jobs were created (the expectation was 165,000). Average hourly earnings increased to $27.90. Over the last year, there have been 2.3 million net new jobs created and hourly earnings are up 3.1%. (We’d like to see this increase a little more.)

We still have 4.3 million “underemployed” folks who would take a full-time job if they could get one. Yes, we’d prefer to see this number shrink, it’s very similar to what we saw in the early 2000s (even though the total employment denominator is a lot larger), and it’s way lower than the 9 million underemployed folks we had in 2009.

I wish it weren’t the case, but monetary policy is still at the forefront of everyone’s mind. The Fed’s latest comments tell us that they have paused their increases and are actually considering becoming more accommodative (i.e. lowering rates). There is a low probability that they will do it later in 2019, and the probability grows if we look out to 2020. 

In my opinion, lowering rates is unnecessary unless we see a further slowing of the economy (at or below 1% for a couple quarters)… but risk assets (stocks) would probably respond well if they did it. 

Rates are not tight by any stretch of the imagination. They aren’t zero anymore, but no one refrains from investing because Fed Funds are at 2.375. Prior to 2008, these rates would’ve been considered accommodative – my how times have changed.

In any case, I am happy to hear that Powell’s Fed remains “data-dependent” rather than “tweet-dependent.”