I should be embarrassed to show up in these old heels
After a much-fun holiday dinner presentation to a Pittsburgh professionals society, I spent the bulk of the week traversing the eastern U.S. with meetings in Jackson, Miss., Hartford, Conn., and my largest each year, the Lancaster (Pa.) Chamber of Commerce. The mood was jolly among advisors everywhere! (Except, that is, for the Patriot fans who lamented that the glory days may be over. I met several Steeler fans, though. A Giants supporter who saw our QB, Big Ben, play at Miami University in Ohio, where his daughter attended, urged his front-office contacts at the Giants to sign this talented player. They passed, so we got Roethlisberger instead.) Some of the most thoughtful comments came from millennials, who seem to be turning up in larger percentages these days in both advisor and end-client meetings. Research by FundStrat shows the U.S. decoupling from the rest of the world on the strength of this largest-ever cohort as millennials finally are starting to form families, buy homes and enter prime income years. With ages 30-49 the “sweet spot’’ for economic multiplier effects, this demographic tailwind is arriving just as the demographic headwinds of aging and declining working-age populations are enveloping Europe, Japan and China. Much as many boomers did, millennials are challenging traditional thinking. For example, people ages 20 to 40 consistently and increasingly favor de-carbonization policies that, in the words of the TIS Group, could be “the knife in the heart of energy stocks” and fossil fuels. Everywhere the macro research firm went in Europe recently, environmental, social and governance (ESG) factors were top of mind—a trend certain to accelerate under European Union (EU) plans to be carbon neutral by 2050. It expects ESG factors to play an escalating role in the U.S., as well, as millennials begin setting the political, corporate and investment agendas.
Heading into election season, political wisdom may suggest it wouldn’t be in President Trump's interest to open a new front in his trade war with Europe. But when has he ever been conventional? Trump made challenging China a signature of his 2016 campaign and is benefitting from it, with public opinion against China now broad and bipartisan, and a new trade deal apparently close at hand. Renaissance Macro wonders if Trump may try something similar with Europe, exploiting such issues as Europe’s 10% tariffs on U.S.-built cars while the U.S. only imposes 2.5% on European-built vehicles. The fact many European leaders disapprove of Trump and his tactics only serves to reinforce his anti-elitist credentials. A key reason Trump’s bond with his supporters remains strong is they resent being looked down upon—remember Hillary’s “deplorables” remark. What’s more elite than European leaders gathered at multinational forums, making fun of Trump? As for China, it’s worth noting Trump has called on son-in-law Jared Kushner to increase his involvement. Kushner is his father-in-law’s closer, stepping in during the late stages of U.S-Mexico-Canada talks that brought about the new Nafta. Ironically, even if Trump is weighing turning up the heat on Europe, European stocks stand to gain from a U.S.-China trade deal. To the extent to which Europe, given its dependence on net exports, was the biggest loser in the growing trade friction between the U.S. and China (the valuation premium of U.S. to European equities is almost as wide as it was during the continent’s troubles in 2012), it could have the most to gain should those tensions ease.
One of the bricks in this year’s Wall of Worry has been the lack of belief by investors and businesses alike. Year-to-date equity fund flows remain highly net negative, sentiment indicators have stayed neutral and S&P 500 futures are still significantly short. Just over half of chief financial officers surveyed by Duke and CFO Magazine expect a recession by the end of 2020 (more below), mimicking what they’ve been saying all year. This is one of my pet peeves about talking heads in our business—they love to call for a recession “in the next 12 to 18 months.” Based on what?? There’s no reason to suggest one’s on the horizon, just as there wasn’t last year when so many said one would start in late 2019. If anything, a Fed on hold and recent data support the optimistic case. Following the framework of the Atlanta Fed’s tracking of GDP since 1990, Renaissance Macro finds metrics consistent with growth in excess of 2.5% next year, in line with our forecast and well above Street consensus. With cash at a record high, there’s plenty of fuel to drive prices higher, possibly in a melt-up fashion if stragglers decide it’s time to jump in. As this extra busy last week of travel is winding down, I’m looking forward to date night with the Mr., a Friday tradition. You know these days, even in Pittsburgh, it’s getting hard to find a table at 7 p.m. in most restaurants. What if I’m not invited back to Lancaster next year, having taken stage in my old Gucci’s? I really must pick up a new pair of shoes. Now how many ladies do you suppose at dinner in these crowded, noisy restaurants are saying to their beloveds, “I’d love to pick up a new pair of Jimmy Choo’s, but I don’t know what with the trade war and all.” Merry, Merry Christmas to you!
- Must be Santa! The NFIB Small Business Optimism Index jumped in November by the most in 1.5 years to a 6-month high, continuing a resurgence that bodes well for economic activity into the new year. The earnings trend led, surging to its second-highest level on record on strong consumer demand. Bloomberg Consumer Comfort rose again, lifting the trend to near an 18-year high.
- Record debt came up in Jackson Household debt totaled a record $14 trillion in the third quarter, up $2.8 trillion since it bottomed during Q2 2013. However, the household debt-service ratio (debt payments to disposable personal income) have fallen from the Q4 2007 peak of 13.2% to 9.7%, the lowest on record dating to 1980.
- Goldilocks for stocks Citing virtually nonexistent inflation even with unemployment at a 50-year low, policymakers this week didn’t signal any rate increases in the year ahead. November CPI and PPI reflected this absence of price pressures, with core year-over-year readings holding steady at 2.3% for the former and falling to 1.3% for the latter, almost a 3-year low.
- Bah, humbug! While their near-term optimism rose to a high for the year, large-company CFOs said they’re preparing for a potential slowdown by cutting costs and debt, increasing liquidity and scaling back or delaying capital expenditures. More than half expect a recession by the end of 2020 and three-quarters expect one by mid-2021. As noted above, they’ve been calling for a recession since last year.
- Passive buyer beware Nearly half of U.S. stock ownership is now in passive vehicles, where the buy/sell decision is determined not by fundamentals but by flows. Banks provide less than half the liquidity vs. pre-crisis, Bank of America research shows, and pension funds’ allocation to illiquid assets is 3 times that of ’06. It views this passive ownership as an unappreciated liquidity risk for the S&P.
- A worry for another day Despite a cumulative 200% return for equities since 2010, chronically low interest rates and pension funding relief have left U.S. plans materially underfunded. Whenever the next recession hits, or if interest rates continue to stay low for a long period of time, this likely will become a full-blown crisis, suggests Wolfe Research. It notes that at the past two cycle peaks, pension plans were overfunded by 22% and 4% in 2000 and 2007, respectively.
I have had not one question or comment on impeachment since it all started! As far as the public is concerned, impeachment seems to be falling on deaf ears. President Trump’s approval rating has held steady throughout and actually strengthened among Republicans and Independents. It’s at the same level as it was at this point of Obama’s administration in 2011. Democrats may have felt they had to forge ahead, but as Medley Global Advisors has consistently noted, if the public overwhelmingly favored removal, it would happen. But it doesn’t.
A weaker dollar would be a tailwind for small caps All year long, the market has been anticipating dollar weakness amid large and rising budget and trade deficits, Fed easing and Trump jawboning. But it has stayed in a bullish trend, with the U.S. the “best house in a bad neighborhood.” This may be about to change. Numerous Street sources note technicals are “toppy” and global re-acceleration could knock the greenback off its perch in 2020.
I want to talk to you about your shoes This is what was on the minds of several gentleman advisors after a festive luncheon in Hartford. One told a story about a prospect he visited at home, who walked him into his wife’s closet featuring a wall filled with shoes and asked, “Can you fix this problem?’’ “No,’’ said the advisor, and the gentleman never became a client. The problem also probably didn’t get fixed because “Mr. and Mrs. are now divorced.’’ However, I concluded that I have entirely too few shoes!