Baldwin Investment Management

Buffetted by Crosscurrents…

It is easy to be distracted.  It is simple to lose sight of the “prize”.  The future is never clear and the present is often confusing.  Doubts swirl, “second guessing” runs rampant and worries abound – but this is the stuff of equity markets where buyers and sellers meet to decide each day if risk is being appropriately priced versus reward.

Stocks chart with S&P 500 Index climbing
Chart 1

So far in 2019, the “bulls” seem to have controlled the playing field.          

Supporting this upswing in prices have been economic fundamentals which suggest that the U.S. is doing pretty well.  Following is a chart we have not used in a while – but which clearly demonstrates a strong correlation between economic activity (truck tonnage hauled) and stock market performance.

Stocks Chart: Truck Tonnage vs. Equity Prices
Chart 2

The far right of the chart would indicate that there is still upside to equities. Another look at the economy from the vantage point of the American worker would seem to point to strong employment. Weekly unemployment claims are extremely low….

Financial Chart: Weekly Unemployment Claims
Chart 3

and workers have little fear of losing their jobs.

Financial Chart: Workforce Disruption Unemployment Claims, Percentage of Payrolls
Chart 4

It is little wonder why consumer confidence is so high.

Financial Chart: Consumer Confidence
Chart 5

Circling back to close this virtuous loop, please remember that the American consumer is about 70% of the U.S. economy (manufacturing about 12% of GDP).   So, if the American consumer is “feelin’ good”, the U.S. economy should do well, which should ultimately translate into good corporate performance and healthy equity markets.

But it is not just the consumer who is supporting the markets.  Inflation is low (in fact the Fed is working very hard to increase inflation to a target of 2%).  Interest rates also are low, making financing cheap.  Corporate profits have surprised Wall Street analysts on the upside repeatedly.  The conservative analytical community has been upstaged by corporate chieftains who have managed their operations effectively.  All of this combined has served to bolster stocks.

Nevertheless, there have been and are some serious crosscurrents with which investors have had to deal.  Foremost among them today are trade issues. We live in a world where international trade has become increasingly important to the health and well-being of most every economy.  The U.S. is more insulated than many because the majority of the business transacted is within our own shores.  America is not as trade sensitive as China, Japan or the Eurozone (all export-driven to varying degrees).  Americans buy a lot offshore and we sell some offshore, but Americans do most of their business within America.  Yet tariffs (another word for taxes) put on products add cost to consumers and disrupt supply lines, which also adds costs to consumption.  Not knowing if or when tariffs will be imposed or on what products or how high they might be short circuits decision making.  Delays creep into the economic system.  Capital investments stall.  Economic growth slows.  The Federal Reserve was on a track of increasing interest rates (reflective of quite strong economic growth in the U.S.) until the tariff regime instituted by Washington introduced a lot of uncertainty into business decision making.  Now the Fed is looking to become more accommodative in its monetary policy.  At least in the short run (and we believe in the long run) the tariffs imposed by Washington and paid by American consumers or American companies – not by the Chinese, the Europeans, the Mexicans or the Canadians- are a “drag” on the U.S. economy and a self-inflicted wound.  Further, constant attacks by the Administration on the Fed and particularly the Federal Reserve Chairman unnerve investors.  Historically, the Fed has maintained its independence from politics, so as not to allow politicians any influence over monetary policy.  Over the decades the Federal Reserve Bank has been criticized from time to time.  Recently the attacks have been far too frequent and strident.  A politicized Fed would upset bond investors who might then presume that monetary policy might be enacted not for the good of the U.S. but for more narrow political ends – a very definite negative.  Finally, there are a host of international issues ranging from a sloppy Brexit, to a balky Italian government, to heightened tensions in Iran and the Persian Gulf, to a Venezuela which seems to be about to go down the drain, to continued Russian interferences around the world, to a more aggressive China on the open seas.  There are always such disturbances.  But added to the “trade wars” and the inflammatory relationship between the Fed and the U.S. Administration, investors have been fretting a bit more than usual.  It has been an especially steep “wall of worry” that investors have had to climb.

Equities are still the most attractive asset class of the three mainstream asset classes commonly held by investors – i.e. cash, bonds or stock.  As long as corporate sales, earnings, cash flow and dividends keep going up in a low inflation, low interest rate environment, we think investors should own equities.  The crosscurrents noted above could have impact (positively, if problems are solved – negatively, if problems get exacerbated) on company results and therefore stock market returns.  We think most issues ultimately will get solved and stocks should respond positively.

A FEW WORDS FROM A WISE MAN…….

Front and center in the political discourse this election cycle is a new debate about the relative merits of Socialism vs. Capitalism.  This emanates from the discussion about wealth inequality in the U.S.  Following is an on-point encapsulation of these two competing systems in just a few words – words to be remembered.

               “The inherent vice of Capitalism is the unequal sharing of blessings.  The inherent vice of Socialism is the equal sharing of miseries.”

                                                                                          Winston Churchill

Enough said…


Predictions for 2019

  1. U.S. inflation, using the Fed’s favorite measure, will “remain around” 2%, giving the Fed some “room” to pause interest rate increases. No – Inflation <2%, Fed looks to become “easier”
  • U.S. GDP growth 2% – 3%; rest of world range 1% (think Eurozone) – 7% (think India)  Yes
  • U.S. unemployment will stay low. Yes
  • U.S. corporate profits +6% – 9%. Yes
  • West Texas Intermediate crude oil will recover to a range of $60 – $70/barrel
    Yes/No – Despite conditions which would suggest $60 – $70 pricing, sentiment is bad in the trading pits
  • The dollar will drift lower.    Yes –the Fed is becoming more “dovish”
  • U.S. consumer sentiment will stay strong. Yes
  • Corporate chiefs will become more timid spending money; state governments will spend more.
    Yes – Trade worries are holding up capital investment decisions.
  • The U.S. and China will do a trade deal.  Yes – Still think so.
  • Equity markets will do well.       Yes – So far, so good

A Final Thought


The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC.  These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

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