By Mitchel Anthony
The US economy continued on its path of acceleration in the third quarter at the expense of rest of the globe. Virtually all sectors of the US economy reported robust growth and improving demand for their goods and services throughout the third quarter. While the naysayers worried about the impact of tariffs and the trouble in social media, the equity markets notched a terrific quarter with returns exceeding 7% or more across most domestic large-cap indices. MACM’s dynamic growth portfolio advanced 9% in the quarter and its diversified equity portfolio advanced 10.1% in the quarter far exceeding the bogey of the S&P 500 which was up 7.4%.
Investors who have been numb to how the impact of tariffs would play out poorly for the rest of the globe felt the repercussions of their disconnect. European markets were mostly soft in the quarter with emerging markets flat to lower as well. The tariffs are clearly more painful for the rest of the globe given the fact that the US is the world’s largest consumption engine of global goods and services and is a minor player in the export game. The Chinese are fighting with their best customer who does little business in their own market. It would seem that their aggressive strategy is misplaced given the policies and strong will of Washington today. Europe is suffering from the same situation. The broad changes in economic policy coming from the Trump administration is reinventing the possibilities for growth for American businesses. The tailwinds for US growth that began with tax cuts are transitioning to positioning America to be a major exporter to the rest of the world with new rules for trade. Further, Trump’s actions of tightening the borders, and intimidating terrorists have made Americans feel safer. This has and is contributing to record levels of consumer confidence which explains our improving picture for domestic consumption.
Social media has been attacked broadly in America and throughout the globe by liberals, conservatives, and the media, seeking another hotspot of drama. Social media is one of the strongest areas of growth in the globe today and is insulated from the impact of tariffs and the bickering between the global superpowers. While these companies may have taken their eye off the ball a bit in allocating their intellect and computer genius to engineer code that is resilient to hacking, it is undoubtedly clear they are more than capable of providing this protection to their clients as they balance security needs with innovative tools for consumers. There have been breaches and there will undoubtedly be more but the progression and growth of the digital world and social media will continue as these deep thinkers in Silicon Valley protect their franchises and continue on their path of innovation.
America is leading the globe in growth
Historically Washington policy has had little effect on the economy with the only strong hammer being held by the Federal Reserve. Past presidents were listening to Lawrence Welk music rather than managing the forefront and keeping America competitive. As a result global growth was more about policy from China and emerging markets than policy in Washington. This has now changed and the impact from Washington policy must be evaluated into an investment posture.
Trump is seeking to re-engineer the playing field for America. Trump is clearly a doer and enjoys the journey of making America great again. The confrontations for change that others have avoided are the battles that he seems to enjoy the most and he is working aggressively for substantial change for how America is positioned in the world. For decades American leaders have been giving away the strong position in the globe that our forefathers fought for that made America “The Economic Superpower”. Trump is putting America back in a strong position to lead the world in industrial production, manufacturing, and intellectual innovation. For decades America has seen its growth slow as our economy became more socialistic. Now with the return to our capitalistic roots with trading and regulatory advantage, the door for 4% or more GDP growth has been opened. It’s exciting what lies ahead for America.
GDP accelerates
GDP in the second quarter came in at 4.2% far better-than-expected. At the same times corporate earnings accelerated with the S&P 500 companies reporting 23% gross in Q2. This was a product of near record consumer confidence that translated into higher retail sales. The tax cuts motivated corporate America to spend money on manufacturing and industrial equipment and these sectors accelerated from their trend of the last few years. Housing in America continues at a fair pace but there have been some signs that prices are flattening as interest rates ebb higher. It would appear that the cost of housing will continue to rise but mostly due to a higher cost of borrowing combined with a flattening of the price of the house. With conditions in the globe softening foreign investors have been less robust in purchasing American properties contributing to some of the deceleration and housing.
No inflation yet
Given the recent acceleration in the US economy one must be vigilant, with an eye on inflation. However, there is no inflation visible on the horizon. Curiously though inflationary expectations are brewing with yields on 10 year treasuries now at 3.2% up from a low of 1.4% in mid 2016. Investors and strategists have been misguided for several years in believing that inflation would be accelerating soon and continue to have overly high expectations for inflation. They seem to be numb to the secular winds that have kept inflation bottled up and will continue to mute inflation going forward. This is the reason why we are 10 years into an expansion with no euphoria or excess capacity in America or in the globe. Obviously when we get the inflation there will be an exciting cycle for investments in Gold, commodities, and then treasuries, which we seek to leverage, however it appears we are still far from this inflection point.
The deceleration in the globe must be monitored and we are holding steady with our posture but positioned to reallocate quickly should the environment start to weaken or accelerate further.
We remain optimistic!