'America's too stupid to be a country.'
Whoa! That’s a strong sentiment from a Nashville investor, who followed up his comment suggesting that many Americans will vote for anyone who promises them free stuff. This week took me to more bankers, with polite meetings in Tennessee and Kansas, following up on last week’s Michigan meeting of genteel bankers. In these two “red states,’’ no one wanted to insult our president, but rather to wonder if “the media can talk us into recession.” Not a word spoken anywhere about impeachment. And the implication everywhere was that in the trade war, China is the bad guy, with concerns about its intentions with 5G and infrastructure investments in countries around the world. Despite positive developments the past week, Brexit and the trade war as the two main sources of optimism are still highly susceptible to headline risk. On the former, the important point from the market’s perspective is that avenues to a no-deal Brexit have largely closed off, although Prime Minister Boris Johnson will have many hurdles to get this done. And on the latter, there are some signs of stabilization (more below), although China’s economy isn’t out of the woods. Its credit growth remains stagnant and it is experiencing increasing capital outflows and a weakening currency. Still, China is the single largest contributor to global GDP growth; if its outlook stabilizes, growth expectations should follow.
The market has been consolidating for about two years now. Could it be about to melt higher? Fundstrat shares that, in the three post-World War II instances when the S&P 500 has gone nowhere for 20 months (as is the case now), a strong upside breakout followed, with an average gain of 51% over 24 months. It suggests S&P 4,500 (!) is possible by the end of 2021, with millennials (I love millennials!) a potential catalyst as they reach home-buying age and feed the GDP multiplier. As the market homes in on the record high—the S&P is on track for its best year since 2013—Q3 earnings so far have been “better than feared” and the biggest market driver (as they should be!), with industrial reports particularly positive. This is notable given much of the growth anxieties over the last few months were borne out of the manufacturing sector. The news there this week wasn’t great (more below), but it did suggest a bottoming, pushing odds of a recession out. A strong equity-market showing at this point is more dependent on investors discounting lower odds of a recession rather than materially higher expectations for stronger growth. Breadth and sentiment are favorable. The NYSE cumulative advance/decline line moved to an all-time high this week, and the percentage of American Association of Individual Investors bulls fell to December 2018 lows, while the percentage of bears is near year-to-date highs, a nice contrarian positive. Moreover, investors have withdrawn a staggering $217 billion from global equity funds this year, the largest annual outflow in 10 years. As earnings expectations improve on fading recession fears and a stabilizing China, any sign equities might beat cash could prompt a sharp reversal, accelerating seasonality that historically swings in the market’s favor this time of year.
If the inquiry leads to impeachment coming out of the House, stocks will have to price the outcome of a trial in the Senate. In 1998, equities priced the Clinton trial pretty quickly, but this was also the period during which the Long-Term Capital Management crisis occurred, which caused the Fed to ease monetary policy. Stocks then began a strong run into 2000. Amid all the headlines, Trump continues to draw large crowds at rallies and, in the last quarter, raised more money than any previous presidential candidate. Incidentally, I love visiting Nashville, as I have a chance to stay with my beloved brother and his lovely bride. Watching ABC morning news is something I rarely do, as I usually have CNBC or Bloomberg on in my hotel rooms. But over coffee at my brother’s house, ABC commentators were discussing the “crisis” regarding the movement of U.S. troops out of Syria. My hosts said nothing and nor did anyone in this week’s travels. And still, no one but the media seems to care about impeachment. Might our media be uttering “crisis” too many times, much as the boy who cried, “Wolf?”
- Housing has always weakened before recessions; at the moment, it’s strengthening While housing starts and permits slipped in September, ending a strong move upward, the slowdown was solely in multifamily. Single-family activity continued to climb, helping construction activity to act as a positive driver for growth. Notably, homebuilder sentiment jumped to its highest level since January 2018 as expectations for home sales surged the most in almost three years, aided by historically very low mortgage rates.
- The market loves Fed easing A third quarter-point cut in as many Fed meetings appears all but certain this month as September meeting minutes captured worries about weaker business activity and investment spilling over into hiring and consumer spending. Also, consumer and business inflation expectations are at respective 6-year and 2-year lows, according to regional Fed gauges. Finally, in a program akin to quantitative easing, the Fed this month began buying $60 billion a month of short-term Treasuries to assist liquidity in cash markets.
- Global green shoots German economic sentiment and China loan growth came in better than expected, the official and private gauges of Chinese manufacturing beat expectations while its official measure of GDP grew 6% year-over-year, and global leading indicators are steadying. Also, Greece, Spain and France reported healthy economic activity, aided by fiscal reforms (not just more spending but also corporate tax cuts). Eurozone growth appears to be stabilizing, a big change from 2018-19’s sharp slowdown.
- Consumers catch their breath Retail sales fell in September for the first time since February, but August was revised up, partly making up for the miss. The drop-off caused retail sales growth to ease to a still-robust 6% annualized rate in Q3, down from Q2’s even stronger 7.7% rate. The moderation suggests some of the anxiety around the trade war and the sustainability of the expansion may be have seeped into consumer purchases, but the most recent Bloomberg confidence gauge rose to near a record high. Yearly sales momentum remains strong and on an uptrend, bolstered by record-low unemployment and near record-low jobless claims.
- GM strike hurts Industrial production slipped in September for the first time in five months. The GM strike caused vehicle output to drop 4.2%, the most since January, and weighed on the output of consumer durables, transit equipment and durable goods. Still, industrial production posted its first quarterly increase since 2019, rising 1.2% for the entire third quarter.
- More signs of summer’s soft patch September leading indicators slipped a second month, with the weakness driven by manufacturing’s slump and the narrowing gap between short- and long-term interest rates (which recently has begun to widen again). The Conference Board said its gauge is consistent with an economy that’s still growing, albeit more slowly.
Extremes at either end often are very similar Trump and Warren have numerous similarities. Each is the zeitgeist of their respective party. Both excel at identifying political villains and defining and debasing their perceived enemies. And both have their political parties completely cowed. Trump’s decidedly un-Republican policies are now core curriculum for a party that previously espoused free trade and free markets. Warren (along with Sanders) has helped place the Herbal Tea Party, as Cowen & Co. calls it, at the vanguard of the Democratic Party.
Four more years? Three different economic models by Moody’s Analytics project that Trump may be on his way to an easy re-election. The projections are based on 1) how consumers feel about their own financial situation (pretty good), 2) the gains the stock market has achieved during Trump’s tenure (not bad) and 3) the prospects for unemployment (it’s at a 50-year low). The models have been highly accurate going back to the 1980 election, missing only once.
Sheesh! Bloomberg BusinessWeek reports that companies across Europe are reconsidering travel policies and individuals are asking whether jetting off to sunny spots for holidays is worth the environmental cost. The Swedes call this flygskam, or flight shame. Sweden’s airport operator has handled 9% fewer passengers for domestic flights this year than last, and beyond Sweden, there’s a proposed ban on intra-country flights in France and, throughout Europe, revived interest in rail travel, which is environmentally more benign than flying.