Leaning Pillars

Jun 14, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

I do my best each week to keep you informed on the latest developments in the market.  Sometimes it is a piece of economic data which surprises to the upside or downside and moves the markets.  Other times, it is geopolitical events which take center stage and drive investors one direction or another.  Frequently, there are unexpected company announcements which make headline news and drive stocks higher or lower.  However, sometimes I like to take a step back and reflect on the bigger picture.  This week is one of those weeks.

There are four pillars of government policy that effect the economy.  Those pillars are monetary policy, fiscal policy, trade policy, and regulations.  The two which get the lion’s share of both media and investor attention are monetary and fiscal policy.  Monetary policy is controlled by the Federal Reserve and, as of last week, appears to be moving toward a more accommodative position (lowering interest rates).  Fiscal policy is controlled by Congress and for some time has been quite accommodative, to the point that we’re generating on the order of a trillion-dollar annual deficit.  However, it is the final two pillars I want to talk about today.

Trade policy often takes a back seat to the more headline-grabbing monetary and fiscal policy.  However, we find ourselves in a period of significant uncertainty, mainly due to trade skirmishes on many fronts.  Whether we’re looking at China, or Mexico, or Canada, or Europe, it seems we’re on the brink of a full-blown trade war on any given day.  While this strategy, and it is a strategy, may make sense in keeping our trading partners off balance, it also has the consequence of keeping companies off balance.  Decisions on capital expenditures, like building new manufacturing plants or hiring additional employees, becomes very difficult.  No one wants to be the executive to expand at exactly the wrong time.  Not only that but companies that produce abroad, whether we’re talking iPhones in China or automobiles in Mexico, are faced with difficult challenges in supply chain management not to mention margins and profitability.  The uncertainty creates doubt, which creates inaction, which leads to slowing economic growth.

Regulations can be implemented for many purposes but also serve to slow growth.  In some cases, this is a good thing, i.e. regulations on pollution or dumping chemicals.  In other cases, it is a bit murkier, i.e. blocking mergers or acquisitions that are viewed as creating an anti-competitive environment.  There are two large mergers that have stalled and a third that is likely to face stiff headwinds.  CVS agreed to acquire Aetna over a year ago and won Department of Justice approval last fall.  However, a federal judge looks to block the merger which would be unprecedented.  Another example is Sprint and T-Mobile which has the blessing of the Federal Communications Commission (FCC) but is being sued by no less than nine state attorneys’ general.  Lastly, there is the recently announced merger between Raytheon and United Technologies which ran headfirst into President Trump’s concern over consolidation in the defense sector.  While it is understandable and often necessary to regulate industries for the greater good, sometimes that regulation is capricious and arbitrary.

Two sectors that have a cloud hanging over them are the Healthcare and Technology sectors.  The former has profited from the exponential increase in drug prices, and is blamed for the opioid crisis.  Health insurance companies and pharmaceutical distribution companies face many regulatory and legal hurdles in the months and possibly years ahead.  More recently, technology companies have come under scrutiny for their privacy practices, i.e. Facebook, monopoly issues, i.e. Google, and anti-competitive business models, i.e. Apple & Amazon.  Despite recent moves to deregulate some industries, like energy, it appears there is a strong appetite on both sides of the aisle to regulate others.

While the media and analysts focus on the Federal Reserve and interest rates, or conversely, Congress and rising budget deficits, we should pay equal attention to the other pillars that go unmentioned.  Trade and regulation are critical components of economic growth and for the better part of this year have been used as a negotiation strategy at the expense of corporations and the economy alike.  The U.S. economy remains on solid footing and despite the trade rhetoric and regulatory hurdles, continues to grow.  Just think how much better off we would be if these headwinds abated and the markets were allowed to grow unhindered.  Now that’s something to think about.

June 14, 2019

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