“There is nothing more deceptive than an obvious fact” –
Sherlock Holmes
Coming up with a way to better frame the current state of
the markets as an update is becoming very tiresome. With the near
passionate frenzy the media exhibits in the face of declining stock prices more
and more often the reasons have more to do with consumer interests than
genuinely informative financial news. Today for example I listed to hours on
end, not about trade issues with China, not about economic moderation,
not about changing attitude to tax policy, but nonstop conversation on the accusation
of bribery from Jeff Bezos to The National Enquirer* over the threat of
releasing salacious photos belonging to the Amazon founder. By the way, Amazon
(AMZN) is a long term buy and in my opinion among the most strategically
original, efficiently managed and gloriously disruptive companies introduced to
the world through the technology revolution. So what else looks interesting?
The Economy
It seems too easy to point to the strong employment data
last week and say the economy is strong. But with the recent declines in US
manufacturing and housing data and the more recent highlighting of economic
moderation in China and widening parts of Europe, it’s important to remain
focused. In part, because some of the weak data can be directly attributed to
trade issues and housing can be traced to the recent increase in interest rates
that slowed mortgage applications and loans for building permits.
In short, there is a lot happening that could turn on a
dime, for example a trade deal could be made. China has also been injecting
their own brand of stimulus in their economy, and Europe needs a stronger China
in its economic balance. In the US, the consumer is alive and consuming and for
now we are all waiting for the natural, if not historic, outcome of inflation
from over spending and keeping in mind that Inflation is an indication of a
healthy economy, too much is not.
The Markets
January through February is the time when corporate
earnings are released. The companies represented in the S&P 500 and the
NASDAQ finished the year on a positive note even when their respective stocks
did not. I take it in stride as many of the more high profile analysts happily
reduced their forecasts during the year end decline, so my expectations for a
good earnings season were intact. But I’m more interested in the guidance
offered by executives that gives a better picture of the rest of the year which
can turn the price of an individual stock around in a second. Subsequently much
of the narrative was constructive, and overall investors found a reason to take
the opportunity to add risk. Now, after the first month of trading in the New
Year, the markets are behaving a bit unruly. Once again however the increases
in the value of the indexes returns us to the two steps forward one step back scenario.
External Events
Once the government was opened it was inevitable that the
contentious debate would come back in mid-February. This coupled with enormous
auctions taking place to refund the countries debt obligations highlights the
growing concern why there is so little conversation about the current account
deficit. On top of that the meetings with China’s trade team are neither good
nor bad, and that creates an air of concern. Only the Fed reiterating their
desire to pause raising rates and continue to watch the incoming data has been
met with relief, but even that is being met with rising concern. And last but
not least is the growing cadre of politicians priming for the 2020 elections.
Not necessarily with any impact on the market, yet, but the kind of distraction
that can be effective in different ways. In my opinion that more likely way is
going to be favorable to the markets, because markets lead the way and the
economy follows. For now unless one believes that a recession is around the
corner, the economy has room to look better.
