The market has had a great few weeks. Earnings announcements in-line or better than expected coupled with economic data that doesn’t seem to be weakening beyond expectations has put investors in a downright giddy mood. Couple that with a possible trade war denouement and we have the recipe for what is shaping up to be a wonderful Thanksgiving and hopefully a Merry Christmas.
Let’s start with the good news. Perhaps taking a play from President Trump’s playbook, China has let it slip that a trade deal is nearly finalized with an agreement that will be implemented in phases. Now I say this is straight out of the White House playbook because President Trump has tweeted similar comments over the past couple of months, only to have China deny them. Whether this is gamesmanship to gain bargaining leverage, I don’t know. But it is affecting the stock market in both cases to the upside. It is a reversal of the bluster and negative news we experienced most of the summer.
While we’re on the subject of China, it came as a bit of a surprise when I read that the best-performing market so far this year was China. The Shanghai index rose 30% YTD which outshines the 8.5% gain in Britain’s FTSE 100, the rise of 11.5% by Japan’s Topix index, and a gain of 22% by the S&P 500. Before you start to think, I want to own more, you should know that the Shanghai index fell 25% last year on the back of the intensifying trade war. While emerging markets are cheaper than they have been in some years, they remain more volatile than the developed world and have a risk profile considerably higher.
As for the economy, the data has been holding steady. Economists and analysts had been expecting the economy to deteriorate through the end of this year and into next year. A large part of this expectation was the belief that the trade war would begin to show up in higher inflation, rising unemployment, and decreased consumer spending. None of that has proven true. We have seen manufacturing slow, inventories draw down, and capital spending shrink. However, the industrial side of the equation has less an impact on the U.S. economy than it might have had fifty or even thirty years ago. With unemployment the lowest it has been in decades, and slowly rising wages, consumers and by extension consumption has not trailed off. That’s not to say we’re on the verge of another economic expansion. However, it is considerably better than the alternative that has been predicted for most of this year.
While things may be moving along adequately in the United States, the same cannot be said of Europe. As I’ve noted in previous writings, Europe has a problem with negative interest rates. When an economy is tanking there are two ways it can be addressed: monetary policy or fiscal policy. Unfortunately, the European Central Bank (ECB) has committed to only using monetary policy by pushing rates ever lower in the hopes that it may spark a recovery. Alternately, they could do what the United States did after the financial crisis in 2008 and use fiscal policy to inject billions into the economy. They have chosen not to do the later and as Goldman Sachs CEO, David Solomon said this week, “I think when the book’s written, it’s not going to look like a great experiment.”
In closing, I am going to let you in on a little secret. Hard seltzer. I know, it’s so 2018 but I’m just learning of this new fad. By any metric the growth of hard seltzer has been astounding. During the past six months, the nation has spent $389 million on hard seltzer: an increase of 210% from the previous year. Forget about craft beer, this is the cool new thing! I say that tongue in cheek because as with all fads, this too shall pass. Anyone remember Zima? For the sake of research, I set out to find this new elusive drink. I didn’t have to look too far as it can be found in virtually every supermarket. My verdict? It tastes like flavored seltzer water. So much so that if you bring it home and put it in the fridge, make sure your kids don’t drink it mistakenly. I don’t see the appeal, but apparently, I’m in the minority. If you’re looking for a “healthy” adult beverage that doesn’t pack the calories, maybe this is for you. Now you know.
Bruce J. Mason, MBA