In Search of Unity

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With one month of the year in the books, it is notable how much ground we have traversed just to get back to the place we started from. The equity market continued to climb out of the hole it dug for itself at the end of 2018, and we endured 30+ days of partial government shutdown. Trade talks continue, and while some of the market improvement is due to the improved tone of those talks, I believe the main impetus for the equity snapback is the walk-back of the Fed’s hawkish tone at their December post meeting press conference. Instead of a Fed on qualitative-tightening (QT) autopilot, we have a Fed that is data dependent with an inflation backdrop that allows the Fed to pause to analyze data for more signs of trade-related global slowdown.  Those signs are there in the more forward-looking data. The Purchasing Manager’s Index (PMI) numbers, out of China and Taiwan, shifted to contraction levels and the data here in the US has gone from unremittingly positive to mixed. When this is coupled with the steady reduction in the Fed’s balance sheet, and the previous rate hikes which have not yet worked their way through the economy, the Fed’s more cautious attitude is entirely warranted and defensible. I think there was some worry that the Fed might play the bull in the china shop just to prove that they were not going to be publicly coerced by the President’s tweeting pressure, but I have more faith in the Fed’s good intentions, and I think the signs of economic and market stress became more obvious as the year progressed. As a result, while Chairman Powell thought he was giving a neutral speech, the market needed firmer confirmation of that and pressed the Fed’s hand more forcefully than the President did.  

The news cycle in January was dominated by talk of the shutdown and the hardship it was causing the affected Federal workers. I believe a key driver to the shutdown’s end was the prospect of severe travel delays and safety issues caused by having too few air traffic controllers and TSA employees working. The fact that we now have three weeks for Congress to work on something that both parties agree needs real attention (border security and humanitarian aid for the asylum seekers) should give one cause for optimism, but one wonders if the well has been too poisoned to draw anything potable from it. Denying access to military planes and refusal to extend an invitation to deliver the State of the Union address from the Capital do not seem like the actions of people ready to calmly sit at a bargaining table willing to try and see things from the other persons point of view. In some ways, I see parallels to the problem Britain is having with Brexit. There was dissatisfaction with aspects of EU membership, a referendum was proposed, politicians made their cases, the vote was held, and the result was clear. The politicians have been unable to deliver on the job they were given. No one is happy, and I get the sense that the incumbents are wondering how they are going to hold onto their seats after a job so poorly done.  Similarly, we had a presidential election where a border wall was a central campaign promise. The candidate who made that promise won, but while he had the majority in Congress, he was unable to make good on that promise. The midterms saw many incumbents lose their jobs. It wasn’t the economy that caused the shake-up. Was it the steady diet of bad news from the Mueller investigation? The invigoration of the opposition as a result of the Kavanaugh approval process? Or was it the first step in a broader move leftward after a brief lurch to the right in national politics?  The similarity I see to the Brexit conundrum is that we have elected officials who are having a hard time getting the job done without causing a lot of collateral angst. That is a recipe for more change in 2020 and may be the best motivation for those in a seat to work towards brokered solutions that leave room for both sides to claim a share of the victory.

I think that another reason the market has bounced is because of the hopeful comments made regarding a trade deal with China. Why do we swallow the idea that a trade deal is in the offing so easily? I think it is because it makes so much sense. Our deficit with China is so large that the inequity of it would be hard to debate if I was on the Chinese side of the table. Based on actions of the Chinese Central Bank and published economic data, the Chinese economy is slowing. Several bellwethers of economic growth and market health (think Apple and Caterpillar) cite declines in Chinese sales as a reason for poor performance. An agreement is in everyone’s interest. I think the market believes that the logical thing that should happen, will happen. Following that line of reasoning leads me to think that a non-deal is more market negative than an agreement will be market positive from current market levels.

A special treat this month was watching Martin Luther King’s “I Have a Dream” speech at the office the day after his holiday weekend. With the benefit of over 50 years of hindsight that speech doesn’t seem so much radical as it does right-minded and hopeful. There was a huge crowd on the Washington Mall that day. I wonder if others in the room were noticing what I did; the harmony of the varied members of that vast audience…young, old, black white, male and female…I know it was ugly in the years leading up to that day, and there were sad days ahead. But that was a special day and I wish I had been there. I was struck, too, by the measured cadence of Dr. King’s speech. He let the words sink in a bit. As we move into February my hope is that the divisions that seem so enlivening from a ratings standpoint and that everyone seems to think are doomed to get deeper prove no match for the real America that wants unity and grand purpose.

Hamilton Davis

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