In a great example of how Trump’s new tariffs on China will reverberate around the US economy, Nike and Adidas are panicking over the new Trump moves. The pair just led a consortium of 173 companies who penned an open letter to the President imploring him to stop the tariff move immediately. Nike and Adidas say the tariffs will be “catastrophic”. Clothing and footwear already endure some of the highest tariffs, so hiking them further will increase costs and create huge logistical complications. The letter summarized their view this way, saying they will be ”catastrophic for our customers, our companies, and the American economy as a whole”.
FINSUM: If you are a company that makes or imports a lot of your merchandise from China, this is going to be a very rough period. We expect the market will start to take this into account as the full impact of the trade war is digested.
There was a beautiful four-month window between December 2018 and May 2019 when everything looked positive. The trade spat with China looked increasingly mild and economic data was strong. It was a mirage. Even the hefty 3.2% GDP growth figure was mostly because of an incredible buildup in inventories, which when stripped away leave growth at 1.5%. Further, revised data shows that industrial production has dropped 1.2% since December. Even though this counts for a small portion of the economy, it is highly indicative of the business cycle. Some areas like auto production and machinery are down much more at 5%.
FINSUM: The glorious rally of the first third of the year seems to have stalled and the bad news is piling up, with the trade war exacerbating everything.
Economic data this year has mostly surprised to the upside. However, recently, things have started to disappoint. For instance, Citigroup’s basket of economic indicators has fallen to its lowest level since the Financial Crisis. Even the Atlanta Fed is bearish, recently forecasting GDP at 1.6%. Bond King Jeffrey Gundlach agrees, saying he believes the odds of a recession in the next 24 months are “very high”. He believes the chances of a recession within 12 months are 50-50.
FINSUM: We think Citi’s indicator is definitely overstating the situation. However, there are legitimate concerns about the economy, especially if you start to consider the possible implications of a trade war.
The Fed has a big new worry that is not presently on the market’s radar. With all the worries about headline economic data and the trade war, very little attention has been paid to the potential shock equities and bonds may feel from climate change. The Fed, however, is very focused on the risk. The Fed says that climate change can have a jarring effect on the economy that may “affect national economic output and employment”. “As such, these events may affect economic conditions, which we take into account in our assessment of the outlook for the economy”, says Fed Chairman Powell.
FINSUM: Calculating climate risk is tough because it can have short-term effects, but also much longer and more challenging ones, such as migration and agricultural output. That said, no one is expecting a climate change-induced financial crisis.
Stocks are once again nearing all-time highs, which is understandably making investors nervous about a repeat of the fourth quarter occurring. While that fear is healthy, the reality is that the underlying conditions of the market are a world different now. Not only are valuations lower, but the economy is looking robust, and perhaps most importantly of all, the Fed has let off the gas pedal with hikes, which puts recession risk much lower. All of these factors seem to conspire to make a perfect environment for stock price appreciation.
FINSUM: Anyone who reads FINSUM knows we lean towards bearish news, but the truth is that our better judgment is telling us that now is probably a time to be optimistic, as the trifecta of reasonable valuations, a solid/strong economy, and a dovish Fed, are in place.