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Wednesday, February 26, 2020

Special Guest Blogger: Tim Kearney

The sudden-seeming impact of the coronavirus has been a surprise this week. It is certainly possible that the pathogen’s spread will accelerate, so of course it’s important to monitor developments. At such times, however, it’s also important to monitor the fundamentals of the economy. A key indicator is the Conference Board’s measure of consumer confidence, which ticked higher in February and is currently holding at six-month highs. And recent developments in the labor market show that jobs are plentiful, with unemployment claims holding at 50-year lows. The February preliminary Markit PMI was 50.8; the ISM PMI on March 2 will provide a broader perspective on the impacts of the coronavirus and the production slowdown at Boeing. Thus far, the economy seems to be managing the issues; certainly, managing well enough to prevent the Federal Reserve from joining the fray and cutting interest rates precipitously.

Thursday, February 20, 2020

The trade-weighted U.S. dollar (DXY) is trading near 1.00, a three-year high, and is pressuring U.S. companies’ overseas profits. Domestic U.S. operations remain strong due to pro-growth economic policies and are somewhat insulated from international problems. That core of domestic economic strength is the reason why the U.S. dollar is a beacon to the world in this time of duress.

Even in good times Europe struggles, as shown by the negative to flat 4Q19 GDP growth in France, Germany and Italy. Japan is far worse; its 4Q19 GDP plummeted 6.3%. Besides the U.S. and China, these are among the largest economies in the world; such lackluster performance has spurred an impetus to flee their currencies for the perceived “safe harbor” of America’s shores.

But a rising U.S. dollar adds insult to injury for U.S. corporations with global operations — it slows demand and exacts currency-exchange losses on repatriated profits. The elephant in the room, though, is China, as it struggles with its own problems. The reflex response of struggling countries is to devalue their currencies — a race to the bottom and a race to the U.S. dollar. The result is this liquidity-driven global rally. I prefer rallies based on improving fundamentals — rising sales and growing corporate earnings.

Tuesday, February 18, 2020

Special Guest Blogger: Tim Kearney

Several factors may cloud the economic outlook in the first quarter. As would be expected, the full impact of the coronavirus is unknown. In the past week the International Olympic Committee proclaimed that the games will be held in Tokyo this summer; reassuring, but there is nearly a half year until the games begin. Unusually warm winter weather has pushed down utility output, which hits the industrial production (IP) report and retail sales. More important for IP is the fallout from the Boeing 737 Max problem, the production of which is an important part of business equipment spending.

The best signal to follow will continue to be events in the labor market, though that market remains a coincident rather than a leading indicator. The jobs front, and basically across-the-board improvements in the January purchasing mangers’ indexes, are telling a positive story for the first quarter; just how positive, we may not be able to tell until the clouds lift a bit.

Thursday, February 13, 2020

I don’t know the difference between the common cold and the coronavirus. A lot of chicken soup seems to do the trick for my common cold. From a market perspective, the question is whether the coronavirus is a geopolitical or an economic event. Geopolitical events, such as U.S.-Iran tensions or the U.S-China trade war, generally have one thing in common: the effect is limited to a certain geographic area and tends to have a brief impact on the market. By contrast, an economic event may have extended impacts across the globe. “Black Swan,” a book written by Nassim Taleb in 2007, focuses on the impact of such rare and unpredictable outlier events. At this time, we do not know if the coronavirus will be a Black Swan.

What we know for certain is that Wuhan and the wider Hubei province is a manufacturing hub for the world economy. It is an integral part of the supply chain, not just for U.S. auto and technology companies, but for the world. It has been shut down for weeks and is having trouble reopening. It has been reported that 60 million people are quarantined, travel is restricted, many airlines have stopped all passenger traffic and shipping has been severely curtailed. This is the supply side impact, and there is a demand side impact as well. Nonetheless, the global markets have surged, shrugging this off as just another geopolitical event. Let’s hope the market is right.

Tuesday, February 11, 2020

Special Guest Blogger: Tim Kearney

Economic data from the United States continues to have a positive look. Of course, there was the blow-out employment data, including a 206,000 print for private payrolls. Average hourly earnings are ticking higher, as is labor force participation. But it doesn’t stop at the labor market, not at all. With trade wars abating, ISM manufacturing PMI jumped above 50 for the first time since July. ISM new orders moved above 50 as well, to the highest level since May 2019. Nonfarm productivity – the key to medium term growth – continues to move higher; albeit still at a relatively low level, it was up 1.8% in 2019 from zero in 2016. Taken together, these data make the outlook a bit brighter.

Thursday, February 6, 2020

The movie “Twins,” a hysterical comedy, featured stars Arnold Schwarzenegger and Danny DeVito. In explaining my 2020 Forecast I was trying to provide a picture of how I see the United States versus Europe and “Twins” popped into my head. From an economic perspective, the U.S. is in a virtuous cycle where everything seems to go its way. Today, China announced reducing tariffs, which is a win for the U.S. economy. Friday’s employment report is looking to be a blockbuster with January’s ADP private payroll increase of an astounding 291,000; initial claims plummeted back down to a near 50-year low; productivity ratcheted up to 1.8% YoY and ISM manufacturing rose back above 50, indicating expansion likely in part due to the surge in U.S. oil exports. On the other hand, Eurozone GDP growth slowed to 0.1% QoQ in 4Q19; France GDP unexpectedly contracted in the fourth quarter; Germany’s GDP, not out yet, but likely stagnated; and Italy’s 4Q19 GDP contracted -0.3% QoQ, for a few depressing metrics. Much of the contrast between the two economies stems from policy decisions. In the U.S., the pro-growth and pro-business fiscal policies include a 40% cut in corporate income taxes and generous repatriation of overseas profits. I said in 2017 on CNBC that it is likely that Europe will respond or become uncompetitive in the world economy. Europe has not responded with similar pro-growth policies. For now, the U.S. economy appears robust enough to offset Europe’s weakness – but for how long? Please see the Voya Global Perspectives 2020 Forecast.

Tuesday, February 4, 2020

Special Guest Blogger: Tim Kearney

Fourth-quarter 2019 GDP was 2.1%, a bit above consensus and right on top of trend growth. The GM strike/auto sector was a significant drag; excluding autos, real GDP rose a solid 3%. Importantly, investment growth sagged, with the drop coming from sluggish corporate investment; this sector is likely to be positively affected by the gathering ceasefire in the trade war. For full-year 2019, real GDP was up 2.3% and the personal consumption expenditures (PCE) deflator was 1.8%, just under the Federal Open Market Committee’s (FOMC) 2% target. Inflation may be closing in on an inflection point. PCE inflation was just 1.6% SAAR (seasonally-adjusted annual rate) in 4Q19. Note that as the low first-quarter rate of 1.1% rolls off comparisons become easier — likely an upward move in core PCE inflation.

Even at that, inflation seems tame enough for the FOMC: if the core PCE deflator in 1Q20 rises 2.7% (a ten-year high) we’d still have core PCE at just about 2%. The FOMC’s message last week seemed rather clear — they are staying the course and maintaining monetary policy where it is now. The economy is unlikely to have a growth spurt unless investment turns higher, and unlikely to generate significantly higher inflation on its present track. It looks like a counterpunching Federal Reserve from here, which is good for the economy.

Friday, January 31, 2020

We know international and emerging markets are risky, but just when you thought it was time to get in these markets get slammed. As of January 29, 2020, the U.S. market, as measured by the S&P 500 index, was still up around 1.42% YTD. But the emerging markets (MSCI Emerging Markets index) were down 1.51% and the international developed markets (MSCI EAFE index) were down 1.03%. That is a spread to the S&P 500 of 293 and 245 basis points, respectively, in one month. Multiply that magnitude by 12 months and you get a sense of how tough going it has been. Meanwhile, the United States just reported an above consensus 4Q19 GDP growth rate of 2.1% as the global supply chains are being severely disrupted, which makes international investing go from bad to worse.

Please read our Voya Global Perspectives 2020 forecast: “Our 2020 forecast is to batten down the hatches for the impending storm.”

Tuesday, January 28, 2020

Special Guest Blogger: Tim Kearney

Global markets have been roiled by the coronavirus and its potential impact, and that makes sense. With a two-week incubation period, it is difficult to estimate the extent of the virus’ reach at this early stage. Over the past five trading days, U.S. indexes are generally outperforming Europe, with Asia and specifically China, at the tail-end. Treasurys looks like a so-called “safe-haven,” with yields down to 1.6% and a 2% rise in the U.S. dollar. The biggest negative impact on the global economy seems to point to tourism, but also to electronics production.

Of interest is the potential impact on the Federal Reserve. At this point there is an interesting peek into the market’s view of the Fed. The market had priced a 30% likelihood of flat-to-lower rates at the July meeting, but now that likelihood has spiked to 50%. It appears that the market expects the Fed to favor maintaining the growth rate in the face of this shock, as it should be at this point.

Thursday, January 23, 2020

U.S. leading indicators dropped 0.3% in December, marking the fourth decline in five months; with November, which was flat, being the exception. Crude oil is dropping, indicative of slowing global growth; yields are dropping again, to a low 1.7 handle for the ten-year U.S. Treasury note; ISM manufacturing has been negative for five months; and U.S. corporate earnings growth was negative for 3Q19, as measured by the S&P 500. I don’t want to be a pessimist, but equity prices are surging in the face of all these contra-indicators and, based upon my earnings forecast, approaching a 20 P/E. I would not pay the current prices for equities, as their underlying fundamentals are weakening. Make sense?


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