A Focus on Ten Positive Fundamentals
Author: Greg Valliere
August 26, 2019
IT’S IMPOSSIBLE TO IGNORE the chaotic G7, mixed signals on the trade war, an attempt to buy Greenland, attacks on Jerome Powell, etc. When the noise gets this deafening, we have to re-focus on the fundamentals — so here are ten that are generally positive for investors, amid the confusion . . .
1. A recession is not imminent. The Atlanta Fed is predicting 2.2% GDP growth this quarter, and that feels about right. The economy is awash in monetary and fiscal stimulus, consumers are still spending and the labor market is strong despite a slowing manufacturing sector.
2. Despite all the talk of a “sugar high” tax cut that only briefly boosted the economy, businesses are still enjoying the lower tax rates and depreciation reform of the last tax bill; that seemingly has been forgotten. And Washington’s spending binge has no limits; could Europe stimulate next?
3. Donald Trump cannot manipulate the Fed. The bombastic president loves to shock, and calling Jerome Powell an “enemy” got headlines — but there are increasing signs that Powell’s colleagues are rallying around him. Gradual easing is still the best bet, but at Powell’s pace, not Trump’s.
4. The trade talks continue. Presidents Trump and Xi are hearing from allies and investors — both sides need to cool it, and we think they will. The financial markets are inflicting great damage on both countries, and Trump seemed stunned by Friday’s sell-off — he most clearly is having second thoughts, as he conceded on Saturday before the White House attempted to clarify his stance.
5. There’s an over-reaction to every trial balloon. Yes, the White House is considering tax cuts and other measures, but the media magnifies every trial balloon. Wish lists are usually aspirational hot air, not actual policies.
6. Voters are smart enough to filter out the noise. They’re annoyed by Trump’s tweets, but it’s way too early to make a call on the U.S. elections, 14 months away. The election worth focusing on is in Canada in late October; Justin Trudeau is in trouble.
7. August is the silly season. A few years ago, the August news coverage was dominated by shark bites. Trump wants to buy Greenland and fire Powell? Just August noise — and light trading volume amplifies the noise.
8. The stakes are too high for this self-inflicted trade damage to persist much longer; the first sign of whether tensions will subside will come in early September, when U.S.-China talks resume in earnest — and when there’s a reasonable chance Congress will approve the U.S.-Mexico-Canada agreement.
9. A modestly growing economy assumes, of course, that there aren’t any grievous mis-steps: Hong Kong, India-Pakistan, Persian Gulf, etc. These aren’t factored into the markets, although a messy Brexit probably is.
10. In focusing on the basics, it all comes down to trade and Trump. Can he take it down a notch, tweet a little less and filter out Peter Navarro? The U.S. economy is fundamentally sound, and there’s still a decent chance of a China trade deal. So now it’s up to Trump, who badly wants a second term, to listen to what the markets are telling him.
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