Current Commentary

It’s de ja vu all over again, as Yogi Berra might have said. Late last year the markets concerned themselves with the health of the economy in the face of two policy issues: interest rates and trade wars. Here we are again. But much like our assessment at that time when it started almost a year ago, we are focusing on the underlying fundamentals. To be sure, these policies are very important and have the potential to derail the aging economic expansion. They should be taken seriously and we are doing so. At the same time, we are still enjoying a pretty strong economy with historically low unemployment and tight labor conditions, increasing wages, improving productivity, and better-than-expected second quarter preliminary GDP gains. As an aside, do you ever wonder why every economic report is characterized as “better than expected”, or “worse than expected”? You’d think these economists would start getting better at their expectations! In any event, the 2.1% GDP gains, while exhibiting some slowing from the previous growth pace, beat consensus analysts’ 1.9% projection. And, to top it all off, quarterly earnings reports have been surprising to the upside significantly. In other words, while the trade and interest rate issues do bear watching, the economy is doing quite well, and that’s what really drives long-term stock direction, along with subdued inflation and accommodating borrowing costs – something we are enjoying on both those fronts.

The investing class was disappointed mid last week when the Federal Reserve announced only a quarter-point easing, but more tellingly it telegraphed no urgency to keep that going. Interest rate watchers were hoping for about half a point and some guidance regarding further declines. They didn’t get it. The markets started drifting down as a result. Then, late last week, President Trump announced additional 10% tariffs on another $300 billion of Chinese imports. Today’s reaction to that, after having digested it over the weekend, is decidedly negative. The one bright spot in all this, is that last week’s declines came in lighter volume, indicating no real appetite for dumping stocks among professional money managers.

As with the 2018 fourth quarter declines, we expect a bit of continued sliding and some kind of catalyst to reverse course. Perhaps it will be the Fed making some sort of musing about “re-assessing conditions”, as they did last Christmas Eve. Who knows? But what we don’t want to do is sell into steep declines when underlying fundamentals are strong. The weakening global economies are of concern, but the domestic economy is holding up nicely. If we were seeing data points indicating an impending recession, that would be one thing. But we’re not at this point.

The question is, how long in the face of slowing non-US economies and continued world trade burdened by tariffs, can the American consumer keep corporate earnings rising?

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