THE SUMMER LETTER
And when in their wake nothing remains but a desert, they call that peace.”
– Tacitus
Economic Perspective
President Trump has launched a trade war without a plan for winning it. Our trading partners, friend and foe, retaliated with competitive tariff imposition. There is little doubt the American polity is beset by political discord of the most venomous variety. Yet, with occasional hiccups, the economy continues chugging away at about a 2 percent annual growth rate.
In tandem with bond markets, the Federal Reserve ratchets short term interest rates higher; in recent semi-annual Congressional testimony Chairman Powell suggested another half point rise before year end. Consumer price and wage growth inflation reached Fed targets of 2%. A strong dollar and mixed commodity prices (precious metals declined; industrial commodities generally rose) keep producer price inflation in check. The economic landscape remains benign; but political event risk here and abroad is pervasive. On balance, economic and political fragility persist. Looking a year or two ahead, forecasters predict recession when the benefits of the recent corporate tax cut wane.
The unemployment rate, which hit a 17 year low in May, shows labor markets are tightening. The unemployment rate rose in June as the labor supply surged by 600,000 workers. Yet inflation is drifting away from the central bank’s target. The rate of housing cost increases slipped as rising inventories of newly built apartments have weakened landlords’ pricing power. Likewise, growing inventories of used cars have weighed on their sale prices. Wage growth rose 2.7% but the Fed’s favorite gauge of inflation, personal consumption expenditures price index, stayed below 2%. As ever, a cautious Fed awaits more data. Elsewhere, the European Central Bank signaled an end to its accommodative stance on interest rates and bond buying by December.
Market Thoughts
Corporate earnings have benefited from onetime corporate tax relief. Despite the occasional hiccup amongst technology stocks and the persistent rise in energy issues, the stock market recovered through the second quarter. Biogen’s favorable trial results on an Alzheimer’s drug triggered a broad rally in biotech names. The Standard & Poor’s 500-stock index advanced nearly three percent for the period erasing the first quarter decline.
In an effort to navigate the challenging equity markets, we emphasize sectors like: consumer staples (Church & Dwight, Ingredion, Kimberley-Clark, Nestle); manufacturers (Hexcel, Wabtec); medical equipment makers and pharmaceuticals (Bristol-Myers, Celgene, Eli Lilly); entertainment (Comcast, Disney, Liberty Media); selected technology (Ansys, Microsoft, Google); insurance (Alleghany, AIG, White Mountains); and, dividend plays like Prologis and Digital Realty (data centers) and ONEOK (energy pipelines).
We have become more cautious in our views. The economic backdrop provides an okay environment for stocks, but there’s not much margin for error.
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Personal
As the saying goes, none of us is getting out of here alive. As I age, the certainty of mortality gets more apparent but I hope not imminent. Should anything happen to me, my daughter Kathryn will let you know. I expect to serve you indefinitely.
Stephen K. Bache, CFA
Sources: Bloomberg Business Week, The Economist, New York Times, The Wall Street Journal, Philip Kerr, Greeks Bearing Gifts
