February 8, 2019

Two Steps Forward, One Step Back

“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.