Eq: Total Market
(New York)
The global economy has not been in worse shape from a trade perspective n several years. Despite progress in the trade war between China and the US, global trade continued to drop in the past couple of months and was down over 1% from its 2018 level in November. Perhaps most worryingly, the falls were broad-based, with the Eurozone, the US, Latin America, and emerging Asia all seeing falls in trade.
FINSUM: The big question here is whether this is just policy-related or whether there is a real decline in economic momentum that is not yet showing up in other figures. Time will tell.
(New York)
The election may still be ten months away, but the whole year is likely to be framed by it, markets being no exception. With that in mind, Morgan Stanley has some advice for investors. The first thought they offer is that in this case, being reactive is probably better than being proactive. If you reflect on 2016, everyone thought that a Trump victory would hurt stocks. The exact opposite happened. In this case, don’t assume a Democrat victory would be bad. Accordingly, it may be wise to wait until the election and then allocate as seems fit at that time. The other thing to bear in mind is that a Democratic sweep could be surprisingly good for stocks. According to Morgan Stanley, ““We would expect that a Democratic sweep in 2020 could deliver the greatest impulse to the economy” because of its greater odds of bringing a fiscal stimulus than when the government is divided between parties.
FINSUM: We really like this line of reasoning from MS.
(New York)
Investors are currently afraid of the turmoil in the Middle East. The US killing of Iran’s military leader has greatly stoked tensions, and markets are worried about a war breaking out in the Middle East. Since there have been many geopolitical issues in the region in recent history, there are a lot of examples of how markets have reacted. Suntrust bank analysts summarize how the market usually reacts, saying “While it is not unusual to see short-term weakness, these geopolitical events tend to have a transitory market impact … For example, when looking at a sample of geopolitical/military events, the S&P 500 was higher 12 months later in nine of the 12 events we reviewed. The three instances where stocks were down a year later coincided with a recession”.
FINSUM: If a full on war does not happen, we expect the effects will be transitory. The other non-military issue that could cause a problem is a big supply shortage in oil.
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(New York)
All the worries about the economy seem so 2019 now, right? Wrong. A big new warning sign just came out of that all important sector that we love to worry about—manufacturing. New data shows the US manufacturing sector is in its worst shape since 2009, according to the ISM. The sector only accounts for 10% of the economy, but it has been suffering mightily as Trump has ratcheted up the trade war.
FINSUM: So the question is whether this weakness is just because of the trade war or whether it signals something more broad. We think it is primarily trade-driven. As a consolation, garbage stocks have usually done very well when manufacturing is weak, according to Barron’s.
(New York)
If your natural instinct is to worry about a looming recession, you are not alone. Logic dictates that with the economy and bull market having been rolling for so long, a downturn is inevitably around the corner. However, the chief economist at Deutsche Bank is making the exact opposite argument. Torsten Slok contends that the economic expansion will likely go on for “many more years”. His explanation: “The lack of willingness to spend on consumer durables and corporate capex is also the reason why this expansion has been so weak … And it is also the reason why this expansion could continue for many more years; we are simply less vulnerable to shocks in 2020 because there are few imbalances in the economy”.
FINSUM: We don’t dislike this view, but in our opinion the artificially low interest rates maintained by the Fed have much more to do with the length of this recovery (and its future prospects), than financial conservatism amongst businesses and consumers.
(New York)
Calm and collected asset manager Vanguard has just made an eye-opening call about 2020. The firm’s chief economist and investment strategy chief, Joseph Davis, says there is a 50-50 chance of a correction in 2020. The market hasn’t seen a correction since December 2018, when it dropped to within a hair of a bear market. Davis says he usually sees about a 30% chance for a correction in any given year. Vanguard says that while investors were too pessimistic about recession chances this year, next year they’ll be too optimistic about re-inflation.
FINSUM: Seems a reasonable call, if rather safe.