THE SPRING LETTER
He turned his back on his native borders
And flew off to a far-away land;
Alongside the merry ghost of freedom”– Alexander Pushkin, “Captive of the Caucasus” (1822)
Economic Perspective
The US economy encountered twin self-inflicted tremors in the latest quarter: trade tensions with China and the EU, and softening global economic activity. Midwestern floods and erratic winter weather compounded the challenges. Accordingly, durable goods orders declined for several successive months, only rebounding in March. Wage inflation remained anemic, until April, as did retail price inflation. Rising wages and companies’ failure to invest in capital goods dampened labor productivity in the first quarter. Industrial production growth continues tepid. Yet first quarter GDP came in at a robust annual rate of increase of over 3%, the best showing in nearly four years. Though much of the surge came from inventory rebuilding.
Further bolstering domestic economic growth is a revival in the housing market and improving consumer sentiment. Through historically low-interest rates, the Federal Reserve, under new Chair Jay Powell, continues to nurture these nascent trends. After several rate rises last year, the Federal Reserve abruptly reversed course in January and placed a moratorium on further rate increases for the balance of the year. The economic recovery remains fragile.
In reaching for growth, corporate America increasingly relies on acquisitions and share buybacks (essentially forms of financial engineering) rather than capital investment and organic growth.
Market Thoughts
The US stock market took its cue from the direction of oil prices: West Texas Intermediate crude oil rose from $50 to $65 per barrel, and reversed the fourth quarter’s sharp decline. Investors feel the pain of losses more intensely than the pleasure of gains. Stock market trading volumes are very subdued. Hence positive corporate earnings surprises are richly rewarded and disappointments severely punished.
The year opened with an upward surge in stock prices. In general, stocks remain fairly priced, but high growth technology stock prices have temporarily galloped ahead of their business prospects. Investors have rotated out of pharmaceuticals and biotechs fearing political pressure on prescription drug prices. A herd of unicorns coming public has captured the investor imagination.
In an effort to navigate the challenging equity markets, we emphasize sectors like: consumer staples (Kimberly-Clark, Nestle, Procter & Gamble); manufacturers (ITW, Wabtec); medical equipment makers and pharmaceuticals (Alcon, Bristol Myers, Johnson & Johnson); entertainment (Comcast, Disney, Liberty Media); selected technology (nVidia, Xylem); insurance (Alleghany, White Mountains); and, dividend plays like ProLogis (warehouses) and ONEOK Inc. (energy pipelines).
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Stephen K. Bache, CFA
Sources: BloombergBusinessweek, The Economist, New York Times, The Wall Street Journal, Kate Welling and Mario Gabelli, Merger Masters: Tales of Arbitrage (New York, 2018)
