Weighing The Week Ahead: Stalemate?

The Calendar

The calendar is a big one. Earnings season is winding down, but there is plenty of FedSpeak on the agenda. I am especially interested in retail sales and industrial production – two important elements in recession dating. Housing starts and building permits are important indicators in an important sector. Michigan sentiment remains important to determine consumer spending potential. Others emphasize leading indicators and the Philly Fed, but they are lower on my list.

And of course, we can wonder whether it matters in the world of tweetstorms and news “hints.”

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.

Next Week’s Theme

Despite the important economic calendar, I expect a different focus for the week ahead. Economic data has had little market effect since the December-January period. Even then the emphasis was on the Fed, not the economy. Since then we have traversed an earnings season with good results versus expectations with little market effect.

The market has focused on geopolitical issues, particularly trade. The big issues seem to be at a point of stalemate. That leaves us to ponder: Does political and geopolitical stalemate imply the same for financial markets?

Background

The financial markets have returned to the “delicate balance” I wrote about last autumn. It is popular to personify organizational behavior and describe this as “complacency.” This lazy shortcut prevents us from seeing the wide range of investor attitudes. A lack of change in price and modest volume can simply represent a roughly equal balance of underlying supply and demand. There are plenty of skeptical investors.

  • David Templeton (HORAN) shows the large flows from equity funds and ETFs into bond and fixed income investments. This is true for 2019 despite the lower performance of fixed income.

  • What happened to the “earnings recession?” Mike Williams cites Dr. Ed Yardeni’s note saying that it had been “averted.”

At the start of the Q1 earnings season, analysts had expected earnings growth to turn negative. But with nearly 83% of S&P 500 companies having reported revenues and earnings for the quarter, earnings continue to beat forecasts, and growth is trending net positive.

As they often have done in the past, industry analysts were too aggressive in cutting their numbers going into the latest earnings season. At the worst of it, analysts had S&P 500 earnings expectations down for Q1-2019 by as much as 2.5% y/y; that was during the 4/12 week. During the 5/2 week, the blended figure including reported results and estimates for yet-to-be-reported results was up 1.8%

He continues…

It’s already working (fear that is) as money leaves those ugly, very risky 15x to 16x earnings stocks, and floods into the 41x to 43x times earnings 10-year bond.

Note: This is the same spot where the experts have told you to be dreadfully afraid of higher interest rates and inflationary pressures as the demons of QE come home to roost.

Alas, no. Interests did not skyrocket after all.

By the way, that is why Mr. Gundlach, the current favourite child of financial media wants you to feel a bear is coming and the market is doomed.

He manages Bonds after all…and a lot of them.

And finally….

The Trade Deal

My own “prediction” before the first US/China meeting last autumn was a flexible deadline and an eventual agreement. It was not going to be easy. The reason is that the initial effects do not seem that harmful. The real-time lesson in economics takes time to play out. Even when we see the second-order effects it may be difficult to link them to trade policy. Blocking foreign trade, traditionally associated with Democrats and unions, has always played well to the public. It has a focus on jobs. The impact on reciprocal trade and consumers is much more difficult to see. This is why trade is the issue with the largest deviation between the conclusions of professional economists and those of the average person. This duality has played out even more badly than I expected.

The President claims that China is paying the taxes. The “get tough” policy plays well with his base. The Pundit-in-Chief, turning his expertise to political strategy, points out that the recent economic data provide shelter for policies that may introduce an economic drag. On this occasion he may be correct. Mainstream news shows focus on the GDP number and the unemployment rate. The Trump approval rating has moved higher, especially on his handling of the economy.

I do not expect China to capitulate soon, largely because they don’t need to.

The result is a stalemate, even though everyone is worse off. It may not be resolved until the 2020 election or shortly before. Some assert that Trump “needs” a trade deal, but why? (NYT) (Business Insider)

Impeachment, Subpoenas, and Investigations

Our daily news is full of new accusations and denials. “Witch hunt” and “case closed” represent one viewpoint. The other sees scores of violations that are certainly prosecutable violations and might be impeachable offenses.

What does it mean? Nothing. The Executive branch is resisting the House in an assertion of power. It may eventually be decided in the Supreme Court. Legislation related to investigations is easily blocked by the Senate or a Presidential veto. The Democratic leadership (although not all of the members) sees the futility of impeachment without a solid case and consensus support. Is there anything more we can expect to learn before the election?

Iran and North Korea

Presidential diplomacy has not advanced the case with North Korea and has escalated tensions with Iran. There are more issues with Palestine and Israel. These are disturbing situations for us as citizens – well worth learning about and expressing opinions to our friends. The implication for financial markets is murky. It is difficult to find immediate impacts, and the issues may continue in current form for many years.

A stalemate.

Implications for Markets?

Most sources continue the piecemeal approach to these stories, highlighting the negative features. As always, I recommend focusing on fundamentals – valuation, earnings, and economic risk. These all remain attractive for long-term investors who ignore the emotional Mr. Market.

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Disclosure: 

If you are an investor, you should be focused on your personal goals and how to get there. Politics and geopolitics are sideshows on that journey.

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Gary Anderson 2 months ago Contributor's comment

The fusion of some Democrats who oppose free trade and Trumo, who hates all trade, is a disaster. It will play out in time. Remember, Trump is implementing his campaign promises. He already said he does not want Beemers and Mercedes on American streets. Wall Street needs to see where this all is going.