2019 Second Quarter Commentary

The stock market has hit a high.  At the same time, corporate profits are stagnant.  When numerator is divided by denominator, what you get is a record high number showing stocks as expensive, rivaling the peaks recorded in 1929, 1972 and 2000.  The current recession in corporate earnings is expected through at least the end of the year, as evidenced by second quarter results.

Meanwhile, measures of manufacturing activity are contracting, purchases of cars and trucks are in decline and rail shipments are slipping across the U.S.  The ISM New Orders index is 50, a number that means zero growth in the industrial sector of the economy, down from 63 in 2018.   Auto sales are on a steady descent, down -3% this year (only Subaru is achieving sustainable growth).  Trucking is down -5%, rail transport fell even more, to a level last recorded in 2014, reversing five years of growth.  While 2018 was marked by strong economic growth, 2019 so far shows gravity is pulling the economy towards the ground.

The Trump Administration has pushed foreign trading partners to revise long-standing agreements, arrangements which have arguably benefitted consumers and corporations despite numerous loopholes sacrificing labor and environmental conditions (yet the Trump Administration hasn’t targeted improving these two areas of concern).  If you can make sense of Trump’s logic on trade, beyond his headline-grabbing tactics, then congratulations.  Trade dislocations mean price increases and production relocating to other countries, away from China.

The Federal Reserve, although its members were split, signaled future reductions in short-term interest rates at its last meeting.  They’d be supportive of economic growth to calm market worries – these monetary magicians hope to achieve the trick of “look away, nothing to see here”.  It’s been working, until it doesn’t.  Longer-term interest rates have declined to nearly record lows. 

Worries fuel the stock market.  The ability to push worries aside levitates stock prices.  Gathering worries are pressures that, once the container breaks, cause investment prices to cascade lower.

It takes time for lower interest rates to spur economic growth.  It might have the opposite effect.  Worries over the health of the economy might further suppress spending.  The Fed might not deliver dramatically lower interest rates.  I question whether the U.S. would ever join the club of countries with negative interest rates, ex. Germany, Japan, Switzerland, along with several other European countries.  The 10-year government bonds of even somewhat dodgy credit Italy are yielding the same as those of the U.S. (shorter 1-year Italian bonds are more notably paying investors an interest rate of 0%).  Remarkably, over $17 trillion of bonds currently trade at negative interest rates, an absurdity only logical when you stand reason on its head.  This means investors could expect to be repaid less than what they paid to buy their bonds.

I’m not throwing in the towel, just giving perspective on how we live in interesting times.  I’ve erred on the conservative side, meaning that we invest in stocks for growth, bonds for income and retain reserves to not only meet your upcoming cash withdrawal needs but also add a cushion of cash that’s ready to invest if and when prices decline to levels more in sync with opportunities.
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Ready to invest across a range of possible future scenarios, I believe that’s a better way of investing for the long run.     

I should have been more kind. It is my fate. To find this out, but find it out too late. 

​– poet Clive James