Over the years I admit to having little patience with so
many of the most recent generation who believe technology will replace
everything. In short order, beginning with fire, technology has always been on
its way to replacing everything, but it hasn’t yet. The stable demands of
simple survival that in the past 20 yrs has reached more people in the world
than ever, defending against the disruptive impact of change, tech or
otherwise, on daily lives may not work for those who may not see the need for a
device they can share their intimate secrets with. But I’d be remiss if I
didn’t mention the three disruptions of the last 10yrs that I’ve totally
embraced. The first, in the realm of fashion, I’ve stopped wearing a tie,
second, I no longer carry a briefcase and third is even more important in the
embrace of lifestyle that has been cleverly called work/life balance. And I
bring this up, because in the world of investment management, growing assets
takes work, come up with an idea, research, analyze and take the risk. But
defending against the disruptions is about life, such as economic volatility,
and when markets reach for new highs, as they did this week, it is somewhat
easier to find investments that represent, food, beverages, health products and
even makeup, that are all non cyclical resources that outperform any economic
disruption. Applying the work/life balance strategy to investment is the best
way to manage the risk imposed by the market. The risk in underestimating what
the market is telling us.
The Economy
There is very little to add regarding the economy right
now from the perspective of its impact on the market. Part of the reason is
we’re in the midst of the earnings season, but the more interesting factor is
the continued moderation of certain sectors of the economy that have punctuated
the economic landscape since the beginning of the year, only to be paused by
today’s first release of 1st Quarter 2019 GDP of 3.2% (vs 2.3%
est.). And although inventory building, which always takes a pause, fueled much
of the data, the underlying data suggested that consumer and residential
investments were not equal contributors, nonetheless the contribution of those
factors could very well be the surprise for this quarter. This is important
because those sectors also were the focus of distinct moderation that upon
closer examination was in fact not enough to eliminate the still positive
annualized (yr. over yr.) data. Suggesting that today’s GDP was probably less
of surprise and which might explain the tepid market response.
The Market
So how is the economy affecting the market? It isn’t. Not
because it’s ignoring the benefits associated with economic impact, but if the
stock market is in fact forward looking, then for many (including yours truly)
the GDP number is not a prediction but a confirmation. Reaction from investors
is more likely to focus on sectors that under performed last quarter’s GDP, such
as retail and housing consumption. Both of which are part of the Consumer
Discretionary sector. This actually makes a lot of sense as much of the recent
market activity has centered around stock behavior at the expense of index
behavior. One the useful by products of managing both the ETF model (Select)
and the Individual Equity model (Hybrid) is that both are designed to respond
to their respective e advantages in the markets, but when ETF’s trade at a
discount to the broader market of stocks it’s a good sign that smart money is
waiting for a correction while the trading money is filling the volatility gap.
The Fed
In the fall we saw a glimpse of yield curve inversion.
For the past few months interest rates have moved decisively lower mitigating
that condition further after today’s unexpected GDP number. The question that I
believe will be coming up in the next few weeks is whether the Fed might see
reason to revisit more rate hikes. The reason is because since the pivotal end
of the financial crisis in 2010, the economy has rolled along in the vicinity
of 1.5% to 2.5% growth. But the more obvious pattern is that the first quarter
of each year, consumers hold back from the proceeding seasonal splurge and home
owners rarely buy or renovate in the middle of the winter months. The result?
The first quarter is usually weaker than the subsequent quarters and that’s a
pattern that should be watched. If the economy gets any stronger the interest
rate markets will likely respond, it remains whether or not the Fed will also,
with a little luck a new Fed Governor, currently being considered, might take
such a move off the table until seeing even more data.
The Interesting Factor
No politics! Amazing result of what could be the start of
pre-presidential race fatigue for which there is historical precedence. In
light of this the interesting factor is that the global economy has not had the
good fortune that the US markets have enjoyed. Sure, there have been some years
with decent returns, but it has been mostly focused on the UK and more
inconsistent on mainland Europe, much of it on the back of weakness in China,
Europe’s biggest trading partner. So, until China picks up (we are prepared)
and Europe resolves its own internal struggles and responds to Asian growth,
the US is the best economy in a modestly growing global economy and, if we’re
lucky with our expectations, that leaves room for a more stable market at home.
And maybe some stable investments to consider as well.
