Baldwin Investment Management

What A Year and What A Difference A Year Makes…

For those who are faint of heart, it is probably best not to search one’s memory regarding market conditions last November. It was an “ugly” time with markets around the world cracking and fast approaching a technical “bear market” (i.e. -20%). Investors had become unnerved by talk of trade war with China and its economic ramifications throughout the world’s economies. National politics in the U.S., Europe, Great Britain, China, Japan and Taiwan were making people edgy and one could hear business leaders making the decision “not to decide” on any business investment because of the atmosphere of uncertainty. Then around Christmas, a market bottom was found – just on the edge of a “bear market”.

Since then markets around the world have pretty much gone in one direction – UP. It has not been so much the case that many of the big worries have gone away, but rather that those concerns have been “risk adjusted” and counter balanced with strong and stronger than expected corporate earnings. Beginning with Q4 2018 earnings reports and then Q1 and Q2 2019 company announcements, investors were relieved that the fundamental “bottom” had not fallen out. Robust business was being done – particularly led by the American consumer. With employment high, wallets were opened. Inflation remained muted and the Federal Reserve altered course from one of raising interest rates to one of lowering them, making borrowing cheaper. The only disquiet that still is present is the lack of robust capital expenditures. Corporate chieftains are still reluctant to invest in plant and machinery because of the continued confusion regarding trade, tariffs and politics. Hopefully this capital expenditure shortfall will not “slop over” and “infect” consumer spending. Because if that were to happen, an already slow US economy could “tip” into recession.

The concern about which everyone speaks is the American trade war with China. Talks have been had over many months. Tariffs (i.e. taxes) have been imposed by both the U.S. and China, which has slowed trade and disrupted supply lines. Certain goods have been priced out of markets due to the taxes. As a consequence, markets, which took producers years to develop, have been lost to competitors. The biggest beneficiaries of the U.S./China trade war have been Vietnam, Thailand and Brazil. Every so often, one of the leading “players” in the government talks makes a positive comment. Traders hear that there might be cause for hope and push up securities’ prices. Then there might be a partial reversal of the previous positive statement and markets turn around. This has been the state of play. Confusion abounds and this is why numerous corporate heads have been reluctant to commit to many large investments – pulling down capital expenditures and U.S. GDP growth. But we still believe that a trade deal gets done. China is slowing and President Xi knows this well. There is already some dissatisfaction in China with his more authoritarian leadership. Unemployment is rising. There are political problems in the far west of China and Hong Kong has been in serious turmoil for months. In short, Xi needs a deal. In America, the political problems of President Trump are very well known. Further, the U.S. economy needs a boost, as it has been damaged by the trade war. So, we also think that despite his bluster, President Trump needs and would welcome some progress on trade with China. If a deal happens, a huge sigh of relief would be heard around the world and the markets would have another “leg up”.