By Mitchell Anthony

October 21 2019


US Economy continues to ebb and flow. 

The recovery in the equity markets that began in January paused in the third quarter as investors became uneasy with weak economic data on global economic conditions, as well as a deteriorating industrial sector here in America.  The consumer side of the economy remains quite robust and as contributed to optimism that has kept the market on a plateau and gave sellers reason to pause.

Most Equity Markets advanced close to previous 2018 highs but have since Plateaued

Most equity industries were trapped in a trading range for most of the third quarter as optimism and pessimism continued to rise and fall throughout the quarter.  Corporate American superstars such as the names in the FAANG have been challenged by concerns relating to Washington policy toward tech companies, increasing competition for content providers, and the changing product cycle for Apple.  As a result these companies underperformed in the second quarter and caused underperformance by most of MACM’s strategies which rely heavily upon investments in these top-quality names with great secular growth. The leadership in the equity market in the third quarter shifted to defensive names that seemed removed from the headline risk that faces tech, healthcare, and industrial names leveraged to global growth.  Financial stocks are finally reporting some better earnings after a decade of promising growth but not delivering, and as a result the stocks have now trended higher over the last month or so.  The sustainability of this is questionable as banks are heavily leveraged to global growth and the yield curve which id challenging.  Then Industrial sector has seen the same sort of cycle play out.  With the possibility of a recession on the horizon investors have quickly discounted highly valued corporate American superstars like Google, Amazon, Netflix, and Facebook.  Very difficult to find anything wrong with the secular growth themes that are driving these great companies but a recession would certainly put a bit of a dent in their secular growth story.  A recession seems unlikely and these names will likely get their mojo back once the economy is done ebbing and starts to flow higher again as trade concerns move to the back burner and pent up demand works its way into consumption again.

Healthcare typically would be a great performer in this kind of market with a defensive investment posture on the minds of investors given the concerns about recession, however the liberal Democrats are attacking the healthcare names and investors will not push these names up again until Trump is reelected.

Secular themes continue

Great secular growth names like Amazon and Google are still highly valued and as a result fail to look extremely attractive as investors worry about recession despite the fact that all areas of their business are performing quite well and the growth picture still looks amazing and early in the ballgame. Businesses decision to move to the cloud is in the second or third inning of the ball game and this will play out very well for Amazon’s top-of-the-line web service business.  Further there is no sign that the move to Internet retailing from brick-and-mortar stores is even in the third inning of the game.  The use of social media continues to affect consumers everywhere in the world and the products and services are well received despite the political concerns that remain about privacy.  These names may ebb and flow for a while until it is clear that Warren is not going to be our next president.

China remains a major threat to the US as the world’s current economic superpower.  This huge population is ambitious, hard-working, and very bright.  Given this Trump does not want to allow them to cheat or get unfair advantage in any way and believes they must be forced to play fairly and not steal the lead but only earn it.

Government and Washington Policy

Central bankers around the world have recognized the global weakness and reacted with modest changes to monetary policy.  Europe has been a bit more aggressive as problems there with consumption are more serious than elsewhere.  In America the Fed has recognized the trade war and the impact on confidence and corporate spending and has moved to a more accommodation position as a result.  Trump likewise has sought an agreement and struck a phased in deal with China already that has eased tension.

The rally in treasuries continued in the third quarter for reasons outside of just US recession fears.  Obviously investors continue to fear recession even though the likelihood of it is poor, but directives from pension plan rules requiring allocations to bonds have got into the movement of money to highly valued bonds markets.  Quite simply we just don’t get recessions when employment is at all-time highs and consumer confidence is close to all-time highs, combined with steady trends in retail sales, consumption, and steady gains in industrial production.  The housing market has been on a plateau now for a year, and is ebbing and flowing as new demand is developing and it may have another run here sometime in the next year as recession fears pass.  Right now the real estate market seems to be highly valued and more expensive than stocks.

Equity Market Leadership

It would seem that the defensive leadership in stocks could easily wane as soon as we start to see a pickup in global growth.  Further the defensive leadership could fall to a renewed investment in secular growth names as earnings reports over the next few weeks convince investors that the secular growth stories of the FAANG are more valuable than the modest growth in defensive names.

We continue to believe that we are in an area of high valued assets and that all asset classes will be moving higher in unison as he economy ebbs and flows and the defensive leadership will likely lose ground to offensive leadership in the next quarter as the economy been begins to flow from the recent ebbs. Conversely if the economy slips further and ebbs more than we could see interest rates move negative and defensive names push higher and highly valued names push lower  . This seems unlikely but is possible. We remain optimistic and believe the portfolio is well positioned for what lies ahead.