Quarterly Economics and Market Commentary (2Q19)
David Lee Smith, Ph.D and George Parks, CFP - Chief Investment Officer
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Whither Our Economy and Markets Goest
You probably know that former President Harry Truman was famous for, among other things, his sentiments about economists. His feelings for practitioners of the “dismal science” led him to jokingly request thoughts from a one-armed economic seer. His reason: the frequent rendition of economists’ thoughts beginning with “on one hand,” only to be quickly followed with something like, “but on the other…”
In that connection, we at American Values Investments, while still constituting a rather small firm, have a team that includes a pair of trained economists: my capable colleague George Parks and yours truly.
George does a superb job of equating economic trends to likely market directions. These days he’s pointing – utilizing but one arm – to the expansion of the nation’s Gross Domestic Product and its recent, steady growth. Nevertheless, he, like most economists, sniffs a short-term rate reduction in the not-too-distant future. That’s a reversal from the recent past, when rate increases appeared to be in the offing. The reason for the abrupt about-face? Concern about the potential emergence of a recession, which obviously would wreak havoc on both the economy and the equities markets. Indeed, for the sake of added perspective, and as George has noted, “Low inflation, low interest rates, and high employment bode well for the economy, and what is good for the economy is good for the equities markets.”
As we’ve noted in the past, corporate earnings and expectations therefrom constitute a key element of market performance. Thus far, in a still-nascent earnings season, the results have been relatively blasé. And as Mr. Parks has essentially observed, most of the guidance has been of the Goldie Locks variety: neither too hot, nor too cold. So, it appears that active investing – with an especially cautious foundation, appears the appropriate approach presently.
Potential Booby Traps Ahead
So, while the economy is anything but predictable currently, a number of factors could emerge during the next year or two to increase the prospects for a domestic -- or even global –financial quagmire:
- For instance, there is the likelihood that a far less accommodative Fed will emerge over time. An obvious result would almost certainly be increased kowtowing to the Congress, and an even tougher row for the president to hoe.
- Beyond that, more and more economists are noting the potential for slower economic growth, at least at home and probably worldwide. One needn’t know much about economics to find that possibility at least moderately daunting.
- You probably recognize that, for most of the current decade-and-a-half, China has been a driver of the global economy. But as The National Interest magazine has pointed out recently, that nation’s growth is clearly slowing. The likely replacement in the role of world economic engine? TNI points out clearly that, “…there may not be any.”
- To label the world’s current band of trade agreements “murky” is largely akin to calling the New England Patriots “dominant.” We obviously need a logical and cogent approach in this domain, but whether we’ll move in that crucial direction in the years ahead is anyone’s guess.
- We in the U.S. have cavalierly accumulated student debt of well over $1 trillion. Clearly that’s a dilemma in need of a solution. But don’t hold your breath. It’s a problem that almost certainly will hang around for about as far as the eye can see. And comprehending what it will mean for economic growth doesn’t require a Mensa IQ.
All in all, the markets are not likely to be driven over a cliff by slowdowns or other economic and geopolitical maladies. As such, the best advice for investors in today’s climate is to maintain a carefully concocted blend of care, caution, and concern.
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