What is Going On With Markets?

What to say about markets at the moment? As market records get established and re-established? Only to see months worth of gains wiped off the board with an arbitrary tweet from the President of the United States (POTUS) concerning China. Then to see it gained back again at any hint that things are back on track.

  • To begin with, the North American economy is now into its 11th year of economic expansion – this is, by far, the longest economic expansion in modern history and certainly since WWII. Most expansions last anywhere from 5 to 8 years on average. During the first half of this expansion, the recovery from the Great Recession in 2008 and 2009, was marked by fairly tepid data regarding job and wage growth as well as fairly anemic GDP numbers.
  • After 2012 and throughout President Obama’s second term, the jobs numbers began to improve drastically. Although wage growth lagged behind, historically low unemployment rates were becoming the trend. In the last year or two, wage growth has finally started to show promise, indicating that an active consumer may be counted on for awhile to come. The absence, until very recently, of consistent and steady wage growth that reflects the low unemployment rate has been a factor in stubbornly resistant inflation growth to this point.
  • The U.S. Federal Reserve’s mandate is to find the “sweet spot” (a.k.a what they call the “neutral rate” whereby they are neither encouraging nor discouraging growth) in the calculus between growth, interest rates and inflation. Two percent is their traditional inflation target and numbers have consistently been coming in under that number. The question often asked is: “Why, with wages finally rising, is inflation so stubborn?” One theory that has some recent currency is that technology has been actually making things cheaper for us. A $200 cable bill? or a couple of entertainment apps that cost a mere $35 or $40 plus your internet service? Disruption is saving us money, it seems.

    What Can Investors Expect?

    So, where to from here? With the US President’s decision to take on long simmering trade grievances over some of China’s trade practices since it joined the World Trade Organization 20 years ago in the form of an aggressive and protectionist trade war for the last 18 months, the effect at times has been to introduce potential storm clouds on what might be a sunny, reasonably clear horizon.

    • To begin with, it appears that the US Federal Reserve, in its bid to use monetary policy to assist the current expansion maintain itself, is willing to try to ameliorate the effects of the President’s policy on the economy. This by itself is slightly odd given the historically apolitical nature of the Fed – but given the pervasive nature of trade policy and its links to their mandate to maintain the economy on a solid footing, it seems as if the POTUS has managed to rope the Fed into assisting his trade policy. Evidence of this is seen in how, after lobbying for a rate cut publicly, then receiving it, the POTUS, the very next day, decided that a new 10% tariff against the remainder of China’s exports to the USA was on deck for September.
    • Markets themselves seem to be in state of stasis – while not standing still completely, they seem to be pricing in a trade deal then removing it based on the latest talks, tweets or trade news, causing some spikes in volatility along the way. This is in contrast to the seemingly more ordered market progress of 2010 to 2017.
    • This volatility serves as a headwind, not to mention a headache for investment companies, investment advisors, and the end-consumers of ETFs and Mutual Funds – the investing public. Bonds are the only success so far to come out of this trade war as both the Fed’s rate cut and outflows from the equities markets are pushing up bond prices, albeit lowering yields.

    Prospects for Resolution

    Beyond the solid fundamentals that the market has exhibited despite talk of global slowdowns and trade wars, there is another solid reason to believe that the trade dispute with China will ultimately be resolved, perhaps before the year is out.  All US Presidents wants to be elected to a second term. With the 2020 election just over 6 fiscal quarters away, time is starting to run short on this US President’s opportunity to not only resolve the issues with China, but to reap the benefits of it in the economy that can be seen and felt by voters well prior to their November 2020 vote. Having investor and consumer sentiment sour during an election year, perhaps causing the economy to slow further and even tip into recession during the campaign would be disastrous for any POTUS seeking re-election, let alone the one who will be possibly perceived to have been the architect of that slowdown or recession. It seems to be a reasonable prediction that this President will not allow for that scenario, therefore the likelihood of a resolution in the trade dispute seems high. After that, markets should be in a position of certainty that will enable businesses to operate more profitably. Given the strong fundamentals still present in the economy, this would be a boon for businesses and investors alike.

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