HOW HIGH CAN WE GO?

With impeachment rhetoric raging and drones and missiles flying around Iraq, there has been plenty to concern investors over the past few weeks. While these events can certainly cause volatility in our markets, nothing seems to be distressing the markets for long. The stock markets just keep setting new all-time highs.

While there were many concerns about a recession only a few months ago, economists now seem to have decided that a recession should not be a problem until mid-2021 at the earliest. As Federated Investors’ Stephen Auth expressed in his 2020 views this week:

“This secular bull has very strong foundations…a ‘third industrial revolution’ in the digitization of the U.S. economy, nearly permanent low bond yields (interest rates) due partly to global demographics, and a base level of caution among all economic players, investors and regulators rooted in the 2008-09 financial crisis. The foundation is very hard to shake.”

WHAT ABOUT THE MEDIA’S FAVORITE ISSUES?

If you have paid attention to the news lately, our friends in the media are happy to entertain us with all the reasons we need to worry about the markets. Federated offered alternate views on some of the most discussed ones this week.

2020 Presidential Election. One of the most mentioned concerns I have been hearing is about our upcoming presidential elections. Stephen Auth suggested a scenario that no one else I follow has suggested: for all practical purposes, the election may be over by March. The new Democratic Primary rules heavily favor the “establishment candidate”, with the so-called “Super Delegates” having a big influence on the outcome. This would eliminate the reason for much volatility that some have been expecting this year, as most of the anxiety has come from concern about the candidates with Socialist views. A moderate Democratic candidate (and Republican Senate) would calm many investors’ concerns about the radical left-wing taking over.

The China trade deal turns out better than expected. With the “Phase One” trade deal now appearing to be nearly done and given the enormous benefits both countries would have from a de-escalation of tensions, we expect that most of the remaining issues could be settled quietly, with China gradually opening their financial markets and removing regulatory obstacles to foreign investment. We saw some evidence of that last week, as reported by Jim Cramer:

“ This morning (Wednesday, January 8th) in something almost nobody noticed, American Express (AXP) finally got the nod, after years and years of waiting, to open up a China franchise all of its own, no meddlesome joint ventures. You get good news like that, and you start thinking the thaw is real. What does it mean for Mastercard (MA) , for Visa (V) , for Goldman Sachs (GS) ?”

That is a very significant development.

U.S. Manufacturing Renaissance begins. Federated now sees a mid-year acceleration in capital expenditures by corporate CEOs. With trade tensions causing so much uncertainty, companies have been reluctant to make financial commitments to expand their operations. While the U.S. consumer has never slowed their spending, the economy needs a boost from the corporate world to get GDP back toward the 3% level that was the norm in recoveries before the financial crisis. With the efforts to bring factories back closer to the markets that they, receding trade tensions and the resulting capital investments should provide some tailwinds to the economy later this year.

WHAT ELSE?

INFLATION. As we have expressed before, inflation is normally what causes the Fed to raise interest rates which in turn causes most economic slowdowns in our economy. We see no sign that inflation will be a problem for a long while.

Higher prices, by definition, are caused when a shortage in supply allows a business to raise prices on their goods or services. Many businesses, large and small, have lost their ability to easily raise prices. Google and Amazon have made it possible for us to shop around the world for lower prices on almost anything we want or need and have it delivered to our doorstep within a couple of days. Without the pricing power of a closed market, inflation will have a hard time getting a foothold in our economy and interest rates should remain low for the foreseeable future.

THE FED. The general consensus (which I happen to agree with) seems to believe the Fed will stay accommodative until they see inflation clearly out of control. The annual turnover in members of the Federal Open Market Committee, which makes the decisions about monetary policy, seems to have tilted the table to be even more accommodative, so no change there for a while.

EMPLOYMENT REPORT. We got another “Goldilocks” report on the economy in the monthly employment report this month. With 145,000 new jobs (and 145,000 more “spenders”), the U.S. economy continues to provide more economic fuel to power our economic engine, in spite of the problems at Boeing, one of the largest employers in the country, and their suppliers. Also, there was some concern that the mandatory increases in the minimum wage in several states might cause wage inflation to be a problem, but average hourly earnings only ticked up a slight 2.4% year-over-year in the December report.

WRAP UP

I will leave you with a quote from a past newsletter that I believe sums up many issues. From Restoration Hardware CEO Gary Friedman:

“A market correction is not a constant. A recession is not a constant. We've bounced back from every recession in the history of the United States, every single one of them. We've bounced back from every market correction in the stock market, every single one of them.”

And our follow-up comment in the June newsletter:

“That has to be some of the best investment advice I have ever heard. Obviously, you need to be sure your ship can withstand any storm that you might encounter, but you have to focus on the ultimate destination and not be distracted by all the noise that our media “friends” put out.”

I know there are many other issues in the news that might have reached your ears and I would be happy to exchange ideas with anyone that has a concern. We are always glad to get your calls.

Sincerely,

Dave Crouch Kim Blackburn Kay O’Connell

Registered Principal Branch Operations Manager Financial Advisor

Financial Advisor

Buffett Quote:

“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.”

Any opinions are those of Dave Crouch and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, market, or developments referred to in the material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. International investing involves special risks, including currency fluctuations, differing financial account standards, and possible political and economic volatility.