Everything’s Gonna Be Alright (?)

“An Investment in Knowledge Pays the Best Interest”

(Ben Franklin)

Everything’s Gonna Be Alright (?)

“And she looked back over her shoulder

Pointed at the sign hanging up on the wall

It said, ‘Everything’s gonna be alright

Everything’s gonna be alright

And nobody’s gotta worry ‘bout nothing

Don’t go hitting that panic button

It ain’t worth spilling your drink

Everything’s gonna be alright

Alright, Alright’”

(From “Everything’s Gonna Be Alright”, by David Lee Murphy and Kenny Chesney, 2018)

I used to think maybe you loved me now baby I'm sure

And I just can't wait till the day when you knock on my door

Now every time I go for the mailbox, gotta hold myself down

'Cause I just can't wait 'til you write me you're coming around

I'm walking on sunshine

I'm walking on sunshine

I'm walking on sunshine

And don't it feel good?

(From ”Walking on Sunshine”, by Katrina and the Waves, 1983)

It is an urban legend that there is a Chinese expression that says, “May you live in interesting times.” It is an ironic English expression that is attributed to the Chinese, but no original Chinese source has ever been produced. Regardless, we most definitely live in interesting times. The US economy is booming (for now), inflation remains manageable, interest rates are under control, wages are increasing, non-US economic growth is positive (but slowing, especially in China), corporate revenues and earnings in the US are robust, and the US stock market is humming.

But there are some clouds on this otherwise sunny horizon: (1) Trade negotiations with China are deteriorating, and the consensus narrative is that Trump simply is waiting until after the mid-term elections before fully engaging in a trade war (against which China will retaliate); (2) politics is never venom-free, but the current level of animosity, cynicism, and partisanship surrounding the Brett Kavanaugh Supreme Court confirmation process is breathtaking; and (3) economic growth outside the US is most definitively slowing down, and perhaps has even peaked. China in particular is slowing down, and the ongoing trade tensions (combined with strong US growth and a generally strong dollar) have wreaked havoc on many emerging market economies.

The consensus view is that the US will not head into recession until later in 2019, perhaps not even until 2020. But it is important to remember that fiscal stimulus simply pulls consumption forward. We currently are benefiting from that phenomenon, as the economy is strong and consumer and small business owner sentiment is as high as it has been in years. But while fiscal stimulus can elongate economic expansion, it does not negate the business cycle. The piper always gets paid.

It is hard to visualize what could derail the current economic growth story – perhaps (1) a distinct ramping up of a trade war with China; or (2) a decisive mid-term election in which the Democrats recapture both houses of Congress and embark on impeachment hearings (and the probability of that, while still fairly low, is rising). Even though we view the likelihood of an actual impeachment as very low, the ensuing rancor and partisanship that would follow would, at the very least, be a distraction that may cause a tempering of economic and market expectations.

With that as a backdrop, looking out over the current economic and investment landscapes, here is what we see.