New York State of Mind

I was in New York this week for an annual investor strategy summit at JP Morgan headquarters. I’ve been attending this for a couple of years now with a group of independent advisors from across the country. It was well attended with a buzz about where this Market is headed. There was also a buzz about the Yankees and October Baseball, but that got quieted quickly Thursday night.

The keynote speaker at the summit was JP Morgan global strategist, Dr. David Kelly. He was, shall I say, bullish and cautious. He’s sort of conflicted right now as this cycle matures. Even the analysts and fund managers at JP were conflicted, some were bullish while others were quite bearish about the prospects ahead. It was no surprise to me that the bond guys and gals were the most concerned. Last year’s session was in the midst of the Q4 sell-off, before the December crash.

One thing is clear: this is the 11th year for this economic cycle, making it the longest on record. It’s also been the slowest growing expansion, with a trend of just 2% economic growth. It has been compared to a healthy tortoise.

Consumer spending accounts for 70% of US GDP. Consumer spending is slowing. Retail sales were on the weak side in September. Chances of a recession are growing, with now a 40% probability of recession being forecast by 2021. That also means a 60% chance a recession doesn’t happen. But it doesn’t take a recession to trigger a big Stock Market shakeout. There have been many of those over the last decade. We are used to those.

CapEx is slowing. American corporations are holding back on investment as uncertainty builds. Trade wars are weighing heavily on psychology and confidence. “Wait and see” are three dangerous words, economically speaking.

It’s very understandable. The labor market has been very strong, with unemployment at 50-year lows. But new hiring has slowed as we approach year-end. Hiring freezes always preempt firings. Dr. Kelly said he’s getting nervous about the hiring freeze. He doesn’t see a massive recession like 2008 ahead. The tortoise economy hasn’t provided a boom that needs to go bust. As he playfully stated, “You can’t do too much harm falling out of the basement window.” The other thing is, when the going gets tough, Americans go shopping… Low rates will provide support for economic slowdown. There’s no boom to bust.

The working age population of native-born Americans is shrinking for the first time ever. Lower birth rates have resulted in an increase in immigrant workers filling jobs. Software and automation have replaced jobs too.

The Fed has been more active in providing economic support. Inflation just won’t rise. Why has inflation been so stubbornly low? Tech has driven pricing down big time. Pricing and services are increasingly competitive. There has been very little wage growth. We’ve also been importing deflation from China for 20 years.

You might question, as we all did this week, why is the Fed cutting rates with unemployment at five-decade lows and the Stock Market near all-time highs? They’re clearly not worried about high inflation. The global economy is slowing. China, Germany, Japan and Taiwan are feeling it most. These are export and manufacturing-oriented economies. The Trade War is stinging them. The Trade War is also being felt at home in America.

In a normalized environment, the Fed should not be cutting. But they will. It’s a tricky game for Jerome Powell. He is feeling pressure at every angle, including from 1600 Pennsylvania Avenue. You may recall, there’s an election next year.

The consensus in the group thinks the Fed wants to cut one more time and then be done. It will be interesting to see how the Market responds. The Market has been addicted to the Fed medicine of low rates and quantitative easing. It’s gotten sort of extreme, with tantrums thrown when it doesn’t get its way. That was certainly the case last December. The problem as we see it: any medicine taken in extreme is basically poison. We are studying these moves very closely. It’s always healthy to spend time with other investment professionals to compare notes and discuss and debate. It’s my New York state of mind. We remain on guard.

Have a nice weekend. We’ll be back, dark and early on Monday.


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