Author: Brett F. Ewing, Chief Market Strategist | Date: 21 August 2019
The much-heralded inversion of the yield curve sent stocks reeling last week and has become a favorite topic of discussion at water coolers around the country. Trade and the Fed continue to dominate financial market headlines as policy mistakes are causing financial market investors to pullback expectations for growth. The economy continues to be held up by the final leg on its stool—employment—and what a strong leg it has proven to be.
The economy continues to be held up by the final leg on its stool—employment—and what a strong leg it has proven to be.
The Federal Reserve: Continues to be behind the curve
We had hoped the Fed had learned their lesson after taking rate hikes further than the economy could support in 2018 and pivoting to weaker monetary policy in January. However, they continue to choose to be behind the curve. Powell’s “mid-cycle adjustment” comment did nothing to give the market confidence that he is going to get ahead of a weakening economy that futures markets say needs three to four more rate hikes in the next year, and could go down as bad as his “nowhere close to neutral” comment did in October of 2018.
History has shown that getting ahead of rate cut cycles are as important as not getting ahead in tightening cycles. The Fed has accomplished being on the opposite side of both. As luck would have it, they have a great opportunity to change the narrative away from an inverting yield curve to an accommodative Fed that is ready to act this week in Jackson Hole and we hope he takes full advantage of it. Doing QT while raising rates was the opposite of every major central bank in the world—it made the Dollar too strong—and now it's time for him to turn over a new leaf and take bigger, bolder action to keep this expansion alive.
Trade Wars Forward Progress: Trump flinches, smartly
The walk back of recent tariff additions after unsuccessful dialogue at G20 meetings was a welcome sight for market participants and a smart decision by the Trump administration. While the initial batch of 2018 tariffs had been digested and mitigated by businesses and their suppliers, no one was expecting an increase. CEOs we’ve spoken with have repeatedly said that would be the straw that finally breaks the economy’s back.
We believe Trump needs to hit the trade reset button. He has gone as far as he possibly can with tariffs without materially hurting the U.S. economy and his tweets that repeat the same things he said a year ago are beginning to look more and more desperate. China is more than likely loving the policy indecision and the economic uncertainty it is creating for US multinational companies. We believe at this point in time Trump is talking to a ghost in China who is hoping to delay until after the election and until after what they hope to be a new administration taking power.
Instead, Trump should leave initial tariffs from 2018 that have already been mitigated on and circle the wagons around an infrastructure bill that focuses on urban areas where democratic votes can be gained. If he could somehow accomplish this and prove that he is indeed a “dealmaker,” he would all but assure reelection and would have even more power in the next negotiation round with China.
The Fed went too far with rates in 2018 while the administration was actively fighting a trade war with the second largest economy in the world, and the inverted yield curve was the result of their efforts. While Powell did indeed pivot and save bulls in January, he hasn’t followed it up with bold enough action. While happy to get ahead of anemic inflation in 2018, Powell seems unwilling to accept what the bond market is telling him and to get ahead of this economic weakness. All that being said, we don’t believe that just because the yield curve inverted that a recession is inevitable; central bank intervention and a flatter curve in general make for higher occurrences of false readings.
For everything to come out rosy, we do need policy makers—both fiscal and monetary—to understand that nearly all the weakness in the economy is because of them and can hopefully be rectified before a recession does happen. Fiscally, Trump has to hit the trade reset button, promise a ceasefire, then begin to focus on a bold infrastructure plan to stimulate the economy. If he put as much effort into infrastructure as he has with China, we believe there is a deal to be had.
Every day of indecision and postponement of actions that will need to be made sooner or later, is another day that the last leg of our economic stool could break.
Through these bold actions, policy makers could ensure growth continues, and give businesses a reason to feel more comfortable with the future. Every day of indecision and postponement of actions that will need to be made sooner or later, is another day that the last leg of our economic stool could break.
Securities and advisory services offered through Centaurus Financial, Inc., member FINRA and SIPC, a registered investment advisor. Centaurus Financial, Inc. and First Franklin Financial Services are not affiliated companies. This presentation is for educational purposes only and is not intended for investment advice or a solicitation of services.