Struggling, flat, messy, puzzling…… a few words I use to describe the U.S. stocks market for the first half of 2018. Ironically the U.S. economy is humming. Sometimes the economy and stocks are in lock step with each other. Unfortunately the last 5 months hasn’t been one of those periods. Hopefully what follows will help make some sense of what’s been happening both economically and in the world of stocks. So grab your beverage of choice and read on.
First, let’s hit the U.S. economy. Since February the dollar continues to climb showing no signs of letting up. The June Institute for Supply Management (ISM) report was stellar once again coming in with a robust reading of 60.2 and Fed Chairman Jay Powell was quoted on June 13th saying the US economy is in great shape and the people that want to find jobs are. Yet look at the performance of the stock indexes below (as of the date of this writing) and you’ll see they’re telling a much different story:
Shanghai (China) – down 21% since January
Hang Sang (Hong Kong) – down 15% since January
Italy – down 10% since May
Germany – down 7% since January
Spain – down 7% since January
France – down 4% since May
U.S – (S&P) down 3% since February
Aside from the U.S., many developed nations are lagging, in terms of the economic recovery. The data clearly shows the U.S. is out pacing the rest of globe in terms of economic growth. The monetary policies of the largest economies around the globe began manipulating interest rates downward in 2009 in order to stimulate economic growth. Fast forward to 2016 and the Federal Reserve began raising overnight bank rates in December of that year as economic confidence was no longer just a goal. It was proving to be a reality. Here we are 19 months later the U.S. economy continues on that same path with most of the rest of world remaining very much entrenched in a pattern of little to no economic growth.
Now consider what influence the geopolitical front has had on stock prices the last 5 months.
President Trump is attempting to restructure trade agreements that were put in place over the last several decades by Democratic and Republican Administrations. Past leaders saw huge economic opportunities in tapping into the growth potential of emerging economies, specifically Asia and rightfully so. Unfortunately many of those deals past administrations struck were focused more on short term domestic political gain. Now, decades later we’re grappling with the effects of the terms and conditions of some of the deals. President Trump contends they need revisited and reworked in order to achieve 21st century parody in a 21st century global economy. However the President’s often crass behavior and methods of communicating with world leaders [anyone for that matter] leaves many to dismiss him as being UnPresidential. Labeling him as a narcissist even Machiavellian to others.
To be fair, he pisses me off at times too. That said I believe world leaders have come to realize this man truly isn’t a politician. He’s not interested in the opinions of others and is prepared to push world leaders hard enough on issues he sees as counterproductive for the future of the U.S. even if it includes the occasional disruption to the U.S. stock market along the way.
Fundamentals fueling the U.S. economy remain intact. Tax cuts are filtering into the system witness the near record low unemployment. Leading Economic Indicators (LEI) are still rising and according to recent commentary from Jeffrey Gundlach and Mohammed El Erian recession is not on the horizon. Our stock market is stuck in a trading range and although still off its high remains the most opportunistic in the world. The grand experiment called quantitative easing seems to have worked to date and appears to be winding down with minimal disruptions so far. Inflation is inching up which is normal and don’t be surprised to see the interest on the much watched 10 year surpass the 3% threshold and hold steady.
We’re in a struggling, flat, messy and puzzling cycle right now most of which being driven by political posturing and tough talk. Be patient as this bull still has room to run.
Until next time………stay nimble………be tactical…………and know what you own
These are the opinions of Randy L Miles, Sr. and not necessarily the views of Cambridge. They are for informational purposes and not to be considered as personal investment advice.