Weekly Update: They all think he's 'crazy' but would still make a trade

04-13-2018

I spent an exhausting but thoroughly enjoyable week in Vancouver, where I was introduced with the French inflection, Duesselle (it’s my favorite, though there is no French in the Mr.’s bloodline). An annual visit, we were treated to some sunshine. I wondered why I had a small showing for what was a large advisor meeting just last year. “You came on the first dry day in four months.” Yes, it rains frequently in Vancouver, but it is a gorgeous city, where everyone seems to be fit. On a clear day you can see beaches, five 3,000-ft. snow-capped mountains, the English Bay (where 15-20 large freighters are always waiting to get into port, a clear sign of world trade) and downtown. For a late afternoon meeting, we crossed over the Fraser River (known for housing 1,000-lb. sturgeon) to Abbotsford, just outside the city, a farming community in which it is prohibited to build any more houses. Here, we were told Canadians’ biggest fear is Donald Trump, his hardball statement, “We’re going to stick it to the Canadians” seared into their psyches. Until recently there had been a lot of concern about Nafta—75% of all Canadian trade is with the U.S. “Trump keeps throwing hand grenades; wants to break up industries.” But this week, Trump softened on Nafta, indicating a deal is close. He also told advisors to study rejoining the Trans-Pacific Partnership. This comes as tensions with China may be easing. At the Boao forum of Asian leaders, China’s President Xi seemed to strike a conciliatory tone, calling cold war and zero-sum mentalities “outdated” and adding, “Let us dedicate ourselves to openness and win-win outcomes.’’ The same day, President Trump noted the U.S. will “probably” do a deal with China. Xi’s speech likely was just a first step because negotiations eventually will get down to non-negotiable positions. For China, that is subsidizing industries related to its Made in China 2025 plan. For the U.S., that is limiting China’s high-tech exports. Getting over these obstacles will be challenging.

Throughout two days of back-to-back meetings in Vancouver, Trump concerns came up constantly. They are obsessed with him! During an advisor meeting, I spotted a gentleman reading a Trump article on his phone. At an end-client meeting, when I suggested a full-blown trade war's unlikely, a gentleman spoke up, “You don’t know that!...I bet he’s not even a billionaire!” A rare supporter, in his office with Trump Tower just behind him, suggested: “They need to take away his phone.” I was told that although there are many “conservatives” in Canada, they would be considered moderate Democrats in the states. A Trump detractor reminded me that while our president’s approval rating is 40% in the U.S., “it is just 10% in the rest of the world.” Canadians are fearful he will be impeached, rocking the stock market. A gentleman suggested the U.S. dollar has weakened because of lack of confidence in our administration. Canadians are very worried about the midterm elections. Midterm years historically have seen flat-to-down market performance the first three quarters, followed by a strong fourth quarter. Monthly seasonality also would support this “flat” forecast for most of 2018. April, however, has been the third best-performing month of the year, possibly linked to seasonal tax filings, refunds and the funding of IRA accounts. In short, tax season often adds liquidity to the financial markets.

With each punch thrown at this market (VIX shakeout, inflation, tariff concerns, trade war, FOMC, fears of growth slowdown, FBI raid, etc.), the blow appears to be more glancing. Strategas Research says there’s a small base taking shape on the daily S&P 500 chart and support in the 2,554 to 2,586 area continues to hold; 2,675 has been a hurdle to moving forward. The average S&P stock is now sitting directly on its 200-day moving average, likely limiting big downside. Attention is starting to shift to earnings, led by banks today. Consensus is looking for positive earnings results, with growth expectations actually rising during the quarter from 12.2% at the start of the year to 18.5% currently. And earnings growth is expected to accelerate in the coming quarters as corporations price-in stronger top-line growth, potentially equating to a better 2019 as companies deploy their profit windfall into worker wages, dividends, buybacks and capital expenditures (capex)…. Canada’s prime minister is the dreamy (all agree) Justin Trudeau. But I did not meet any vocal supporters, rather those who bemoaned his resume: “a snowboarder who taught drama school for a minute.” Trudeau has the highest approval rating of any leader in the world, except in Canada. I was told that he has buckled under pressure to block the building of the Kinder Morgan Pipeline, which advisors and their clients complained about bitterly in numerous meetings. “We are true laggards…he is impotent.” A July 2017 Sky News article is entitled, “Why is Canada’s Justin Trudeau so popular? He’s not Donald Trump.” Hmm…. I asked over and over, “would you like to trade with us?”…a unanimous “Sure!”

Positives

Goods-producing sector on fire Goods producers in February created more than 100,000 jobs, the biggest percentage increase in 34 years. In contrast to the steady growth in the service-providing industries, there has been a clear acceleration among the various employment statistics for manufacturers and other goods producers, culminating with aggregate payrolls rising over 7% year-over-year (y/y). Readings above 7% y/y have been rare since 1984.

Where are we in the economic cycle? At April's end, the U.S. economy will have expanded 106 consecutive months, matching the second-longest expansion on record. The longest is the 120-month expansion from March 1991 to March 2001. By July 2019, this will be the longest expansion on record assuming we get that far. The factors most likely to accelerate the end of this cycle are a phony trade war between the U.S. and China becoming a real one, and the yield curve inverting quickly and sharply. The factor most likely to extend this cycle is very benign inflation reinforcing itself in 2018 and 2019, tempering the Fed hiking cycle and possibly extending activity further, which could mean this would be the longest cycle on record by some distance when it eventually ends.

More signs of labor-market tightening The Employment Trends Index rose in March at its fastest pace since January 2015, suggesting the month’s disappointing jobs report was largely noise and signaling a near-term pickup in growth. February's JOLTS report showed job openings slipped from January’s record high but remained at levels indicative of companies facing difficulties finding workers.

Negatives

If we’re ever going to get inflation, this would be the year Y/y headline and core CPI and PPI accelerated, continuing their gradual climb. The 2.4% y/y increase in headline CPI was the most in a year; headline y/y PPI reached 3%. Actual and expected price pressures also picked up to their highest levels since September 2008 in the monthly NFIB survey (more below). Wage gains continue to be modest. But Ned Davis Research posits pay is being driven by non-wage sources such as bonuses and stock options and that the emphasis on average hourly earnings may be presenting a false picture of subdued compensation gains.

Small business enthusiasm moderates The NFIB optimism gauge fell in March by the most since June 2015, though on a historical basis, the mood was still very upbeat and, on a quarterly basis, its highest level since 1984. Eight of 10 components slipped last month, led by a drop in the share of firms that expect the economy to improve in the next six months. Notably, both actual and planned capex declined, the latter matching its November 2016 low.

Consumer sentiment surprises The first take on consumers' moods in April unexpectedly fell to a 3-month low after reaching a 14-year high last month. Trade war worries drove the decline. Still, the gauge remained at levels supportive of increased spending. Bloomberg’s weekly index of consumer sentiment hit a 17-year high as consumers’ assessments of their personal finances was the best since August 2001 and their views on the buying climate were the most positive since October 2000.

What else

It was 20 years ago today Impeachment was a big part of the 1998 midterm election—you can literally take the developments of the special counsel back then and overlay them with the S&P 500. But the more impeachment gained steam, the more energized Democratic voters became to hold off potential election losses, stymying what early in the year looked like a sure thing for big Republican gains in the midterms. Might Robert Mueller’s investigation actually help Republicans in the same way this year?

Ballooning budget deficits takes us closer to a bond bear The CBO estimated the federal deficit is expected to top $800 billion this year and $1 trillion in 2020, causing growth in the federal debt to accelerate beyond 7%, the historical post-war growth rate. Political reporting on the CBO outlook neglected to mention a dramatic $2.5 trillion upward revision to nominal GDP growth over the next five years, making 30% of the “cost” of the tax cut already paid for. As a percentage of GDP, the trillion-dollar deficit is manageable, as long as there is no recession.

I’m a boomer, unfortunately The Atlanta Fed’s Wage Growth Tracker shows the 12-month moving average of median wage growth for prime-aged workers (25 to 54 years old) was 3.5% as of February 2018, and an even faster 7.5% for workers 16 to 24 years old. Meantime, the comparable figure for those 55 and over was just 1.9%!

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