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2019 Q3

Despite the media wanting to talk us into a recession, the U.S. economy actually looks fairly healthy, thanks to the consumer. At an unemployment rate of 3.5%, the U.S. consumer is around 70% of the economy. That industrial production has slowed is not a surprise as we have been expecting this to occur. In fact, we expect the consumer will spend somewhat less over the next 9 – 12 months, however, that portion of the economy is doing so well that even slower spending should keep us out of recession until the next growth phase begins. Altogether, we would expect annualized GDP to slow to around 1.5% to 2% at the low point which we see next year. There are risks to this end of cycle and I would like to address these.

First is headline risk. Specifically, the media trying to talk us “into” a recession. If you listen to the mainstream news every day you would think the economy is on the brink of disaster. While far from the truth, the continual bombardment may take a larger than expected toll on the consumer which could slow spending even further than we expect.

The second risk is ongoing geopolitical tensions, namely the trade war with China, but there are risks in other trading zones as well. I think It is important to see all the moving parts with China trade and understand the game board. First, there are strategic and tactical parts to trade with China. Strategically, we are winning the trade war with China because China is more dependent on selling to us. This is beneficial to us as we negotiate. Tactically, it is hard for a democracy to win a trade war against a dictatorship that does not have to be re-elected. This is beneficial to China. On top of this, within the White House, there are two camps with differing views. The first camp sees this as just a trade war, nothing more. The second camp sees this as a National Security Threat and that the stealing of intellectual capital from the United States must be stopped. This camp is currently winning.

It is also essential to understand that the economic rise of China over the past 50 years has been, at least in part, due to big tariffs, selectively closing and opening markets, government subsidies, and the aforementioned theft of intellectual capital – things we just don’t condone in the West. The Trump administration is pressing hard for change and there are many reformers in China that agree, but there is another camp that wants to keep things status quo. As trade meetings progress, we will see which camp in China is taking center point.

The portfolios continue to perform very well. To note, our adjustment earlier this year to reduce risk in fixed income has benefited this area of the portfolio. In addition, our continued underweight to international markets has been positive for us as well. We will look to continue to make adjustments accordingly as we walk through the end of this economic cycle. Please let us know if you have any questions.

As always, we appreciate your trust.

Marc Henn, CFP®, President