A relatively flat stock market obscures the volatility and uncertainty that characterized this third quarter. Trade was the biggest issue going into the summer and as we exit the warm weather little progress with China has been made. Same could be said for other important trade issues such as Brexit and congressional passage of the USMCA, the new NAFTA deal. The stalling of USMCA is particularly troubling in that both Republicans and Democrats seem to generally believe it is significantly better for America than its NAFTA predecessor. Current politics, however, seem to dictate a refusal to give this administration any victories even if they benefit the country.
Political rhetoric and congressional actions suggest that Congress is unlikely to do anything truly meaningful to help the economy before the election. Similarly, China may choose to wait out the election cycle if not for the fact they desperately need food. This suggests a partial deal is still on the table, but it seems unlikely China will materially alter the way they do business as things stand now.
What does this mean to the U.S. economy? While the economy clearly slowed this quarter, it is hard to determine precisely why corporations have pulled back. Meanwhile consumers remain strong with unemployment at 3.5% with increased participation levels and higher wages. It seems highly suspect that we will have two consecutive quarters of negative growth, which defines a recession, in this employment environment.
I would not be shocked, however, to see a bit of an earnings recession for U.S. corporations. Companies are being forced to adjust their supply chains and seem hesitant to project much growth going forward. This will certainly impact earnings short term in some industries. I may be in the minority, but in the long term, these strategic shifts may not bore out as poorly for stocks as some expect. In a less China centric world, we expect less deflation which may allow U.S. wages to rise further, and I would expect employment levels to remain high. Conversely, should we reach a real deal with China, stocks would benefit as they had before.
In either scenario, trade will work itself out over time. Stocks can continue to be strong as an investment vehicle of choice in light of low interest rates, a friendly Federal Reserve and few investment alternatives.
Joseph H. Ray