Before I begin this morning, let me thank my colleagues who filled in last week and presented their perspective on the economy and stock market. I hope you found their thoughts informative.
Stocks fell Friday after it was disclosed that the Trump administration was contemplating restrictions on investment in Chinese businesses. Also last week, President Trump suggested that trade talks with China were going well and an agreement might come sooner rather than later. Let me try to put both into context. The comments regarding investment in China most likely refers to an SEC effort to make Chinese companies with shares listed in the U.S. be required to follow the same reporting standards as American companies do. Under the Obama administration, exemptions were granted in order to allow Americans to invest in fast-growing Chinese companies and permit some of those companies to list on American exchanges. That was never a good idea. Bad accounting or voids in the relevant information provided only lead to bad results. Every company choosing to list their shares on American exchanges should follow the same set of rules. If one wants to attract U.S. investors, one needs to pay the price of financial transparency and integrity. Kudos to the SEC for attempting to require full and proper disclosure for all.
As for the progress in trade talks, I think those comments, mostly from the President’s tweets should be regarded as virtually meaningless. The only substantive talks so far have been among mid-level negotiators. Anyone involved in complex negotiations knows that it is the last sticking points that are the hardest. Obviously, I am not a party to the trade talks and maybe some easy agreements have actually been reached. But I suspect the positive remarks on trade last week were as much to divert attention away from impeachment and the Ukraine as it was a substantive comment on the future of trade between China and the U.S.
As I suggested before taking off last week, we were in a period toward the end of each quarter where the news flow was light and little change in the economic outlook was to be expected. Of course, political turmoil grabbed all the headlines, not only from Washington but from London and Tel Aviv as well. The rancor certainly reached high levels but from an economic point of view, nothing happened. In the U.S., as impeachment inquires begin, the big question is can Congress get any other business accomplished? There are still spending bills that need to pass and there is little doubt that will happen. Less certain is the outlook for the certification of trade agreements with Canada and Mexico. House Speaker Nancy Pelosi is trying hard to keep the legislative calendar on track. She has a good working relationship with Trade Representative Robert Lighthizer and he has the respect of Congress. With all the political infighting, first term Democrats who want to get elected next year have to show constituents that they can get something done. So far, they have done very little. Getting a trade deal through is important for all, and I still think the odds are better than 50-50 that it will happen. Beyond that, look for very little from Congress between now and next year’s election. Unfortunately, that isn’t much different than what we have witnessed for the past decade.
The uncertainties in Britain are a bit more concerning. There are still a whole range of possible outcomes between now and the Brexit deadline next month. New Prime Minister Boris Johnson seems to have lost whatever control he started with and the headlines there are at least as rancorous as they are here. There remains no obvious outcome. Anything from another delay to a hard withdrawal remain real possibilities.
As for the big headline story, the efforts by House Democrats to move down the path of impeachment, history shows that these events have very little impact on the stock market. While the news grabs headlines, it doesn’t change the way Americans conduct their daily lives. This week will bring a stream of economic data likely to show a continuation of a slow growing economy. Once again, the most important item will be Friday’s employment report. As long as Americans are gainfully employed and real wages continue to rise, our economic growth path should remain in place. Inflation remains low but not non-existent. Indeed, if I were a Federal Reserve banker (and last time I checked I wasn’t) I would find little incentive to tinker with lending conditions any further, at least from the perspective of interest rates. Another quarter point cut at the end of October remains a possibility, but it is equally possible that the Fed takes a pass this time around and waits until December to see if another cut is needed. Negative rates continue in Europe, but central bankers everywhere are starting to believe that moving rates even further into economic territory might be more damaging than beneficial. As a result, rate changes have calmed down in active markets with the 10-year Treasury hovering around 1.7%. If the Fed must do something, it should take steps to increase liquidity in the overnight repo market. It can do that by injecting cash into markets via open market purchases and allowing its balance sheet to grow in line with money supply. The Fed is likely to formalize that over the next several weeks.
Otherwise, we wait for earnings season and, perhaps, some real progress on trade later in the fourth quarter, which starts tomorrow. Today’s market will be dominated by window dressing as fund managers pretty up their balance sheets for third quarter reporting. Earnings in the third quarter should be OK with a bit less currency-related pressure than was felt in the first two quarters. But as always, it will be management forward looking commentary that will get the most attention. Cyclical, industrial, commodity and financial companies should all have relatively guarded outlooks. Virtually all multi-national companies will note the risks of higher tariffs. Companies that cater mostly to consumers and tech companies focused on software and the transition to the cloud should have better news. Recent high profile IPO failures will remove some luster from that market, but if you believe either should be profitable or on an obvious path to profitability in order to be a public company, that should be good news, not bad.
Today, Academy Award winner, Marion Cotillard is 44. Johnny Mathis turns 84.
James M. Meyer, CFA 610-260-2220