Broker Check

2018 Second Half Outlook

Gathering Storm Clouds or Sunshine After the Storm?

 

July 19, 2018


We are now half way through 2018, and as of the end of June, most of our account values are just about where we started the year.  While the economy seems to be humming along just fine, the market is marking time.  It seems there is always something to worry about.  A few months ago, the great fear was nuclear war with North Korea.  Now everyone is obsessing over the possibility of a trade war with the rest of the world.  Given a choice … 

You may have noticed that I have not wasted a lot of ink either praising, defending or criticizing President Trump.  This is a man who inspires a very visceral response in most of us, for better or worse, and nobody cares what I think.   Fact is, though, I’m not sure which would be the most appropriate.  Certainly, to the extent that one might be supportive it has gotten more difficult to be so since his meeting with Vladimir Putin last week.

Few objective observers would deny that the President has achieved some wonderful things for our economy.  On the other hand, I often find his juvenile behavior and obnoxious twitter habits disrespectful of the presidency.  It is the normal state of affairs that presidents are alternately admired or despised based on one’s personal political views.   But never have we had a president who gave his critics so much credibility and at the same time, by his own actions, made it so difficult for his supporters[1].

Here’s the thing though; agree or disagree, like him or hate him, the man has a plan, he knows what he is up to, what he is trying to achieve, and he is intent on getting it done.  In his view, and in many respects, I agree, he inherited some very serious problems which he is intent upon correcting!  Larry Kudlow made a comment in a recent TV interview that previous administrations, Republican and Democrat alike, have called out our trading partners –North American, European and China, all, for many of the same issues as Trump has raised, but nothing happened, nothing changed, and they did nothing about it.  Kudlow comments that this president has the intent and the intestinal fortitude (Kudlow said “backbone”), to do something about it.  He has powerful tools at his disposal and he is not reticent about using them, so you should expect that much of it is going to happen.  You should plan on and for it.

I am not a political commentator.  My charter is what does this mean for the economy and therefore, how should it inform our investing expectations and plans?  The concerns about the potential impact of tariffs is valid, but I don’t think the subject is widely understood among those who are leading the discussion in the media.  (Another recent quote from a respected commentator, Jim Cramer: “I expect the average investor has a much more positive view of the President’s tariffs than does the media.”)  I believe it is an open question as to whether a real trade war is in the offing.  I believe the President recognizes the impact a trade war would have on the economy, and therefore to his own economic wellbeing as a successful businessman, not to mention his legacy as President.  While much evidence may suggest otherwise, I believe he is rational, and he has a rational strategy.  And I suspect there is more likelihood that he will be successful than the media is giving him credit for.  The media, not his foes.  I think his political foes recognize the possibility that he will succeed, and it scares them to death, politically, thus their almost manic response and resistance.

Here’s my prediction.  (1) President Trump is not the only world leader who recognizes his political wellbeing as well as his legacy is at risk in a trade war.  (2) Much of what we hear in the media is inaccurate in the first order, (see “Cramer”, above) but is also hyped beyond its significance or importance.  (3) Posturing aside, cooler heads will prevail and responsible parties will find a way to compromise (or declare victory and retreat).  (4) Result – the trade “war” will turn out to have been more of a skirmish, and will soon fade into insignificance as a news item.   And – key point! -  the US, and perhaps the world economy as well, will benefit from its having happened. 

Yeah, I really believe that.  Tariffs are a negative for economies – for the imposing country as well as the one upon which imposed.  That seems to be a widely accepted given among economists.  So why does virtually every country administer them?   

It turns out that Donald Trump is really a “Free Trader”.  His position … this is not adequately reported or acknowledged in the discussion, but it’s the most important point … Trump’s position is “Let’s get rid of all tariffs”.  His introduction of new tariffs over the past few months has been entirely reciprocal.  Retaliatory tariffs would be an acceptable approach I would think, but currently the correct word is “reciprocal”.  New tariffs are only being applied in situations where the country in question has tariffs on US goods in place and reciprocity is being sought.  As I understand it, there are no unilateral US tariffs being imposed.  Trump:  “You drop yours, we will drop ours.”

This seems to me to be a situation which offers itself to a negotiated settlement to everyone’s benefit.  I think more of the decision makers realize this than are politically able to acknowledge it, but resolutions will evolve perhaps incrementally at first, but ultimately in a gathering wave.  This will not occur overnight, however, and probably will not in any case set the stage for new market gains, at least not right away.

“What’s next?”, you might reasonably ask.  From nuclear war to trade war to political war.  The midterm elections will soon begin to consume the public interest as well, and elections have evolved from sport to war in the American experience.  Something new to worry about. 

Elections are always noisy, and often disruptive to stock market performance.  What’s different this time is that the noise began on November 8, 2016, last election day, and has been growing ever since (the visceral thing), so there may be less impact on the market than would ordinarily be the case, our collective attention span being what it is.  On the other hand we always are looking for something to worry about and politicians seeking election are very good at filling that need.  Warning … don’t trust the polls, whether they support your views or stoke your fears.  If we learned anything at all from the last election it is that the polls are not trustworthy.

All in all, considering the current dynamics as discussed herein, my expectations are limited for the next quarter, perhaps even through the end of the year.  Or at least until after the elections.  On the other hand, and this is “BREAKING NEWS”, stock market activity (what we call technical indicators) has been positive over the past week or so, possibly pointing towards another breakout to new highs.  The NASDAQ has already set a new record high this week, and if either the S&P or DJIA[2] can follow suit, this could provide the impetus we need for further significant gains this summer and into the fall.  The market loves to “climb a wall of worry”, to use a term with which most of us are familiar.  Regardless of what happens in the meanwhile, obviously the ultimate outcome of the election can and probably will move the market in significant ways – one direction or the other.

As I said at the beginning, and this should be the key take away, the US economy is performing very well, all the indicators we look at – inflation, employment, interest rates, etc., are “within acceptable limits”.   The noise … well there is always noise, so when today’s fears fade away something new will take their place.  Eventually, however, economic reality will prevail and the long-term trend, by all appearances, continues to be positive.

 

Sincerely,

Jim Denton

James C. Denton, CFP®, EA
Managing Principal


[1] Some of my investors have questioned why I am not writing as frequently as I have in the past.  My newsletters, after all, provide insight into how I see market activity, and how those insights are informing my investment decisions.  Very simply the reason is it has become increasingly difficult to provide any kind of market analysis without venturing into a political discussion which, depending upon your own views, may be taken either as a manifesto or a diatribe.  I am exceptionally conflicted, as I have expressed herein, about this President.  I live with the hope that “we will understand it better by and by.”

[2] The NASDAQ, S&P and DJIA are market indices, measuring the price action of a specific collection of companies designed to represent the entire market.  You cannot invest directly in any of these indices.

 

The observations and opinions expressed in this commentary are those of the author and do not necessarily reflect the views of Kestra Advisory Services, LLC or Kestra Investment Services, LLC. This commentary is for general information only and is not intended to provide specific advice or recommendations for any individual. You should consult with your personal investment advisor before acting upon any information contained herein. Income Tax services provided by DFS Advisors, LLC are conducted as an outside business activity separate and distinct from our relationship with the Kestra companies. Kestra Advisory Services, LLC and Kestra Investment Services, LLC do not provide tax advice or services.