(Bloomberg) Thanksgiving is upon us. While the rest of the world carries on as normal, the U.S. is about to shut down for a long weekend to over-eat and count its blessings. As investors, they have plenty of blessings to count this year. With the U.S. stock markets closing on Thanksgiving Eve at yet another all-time high, this has been a year when you could make a 25% return by sticking money in the index and then putting your feet up. U.S. performance has helped spur on the rest of the world.
But why has 2019 worked out so well for investors? Here’s a list of things for which anyone with money in the U.S. stock market should be grateful, with links to my Thanksgiving playlist.
Central Banks U-Turned
Nothing is more important than this. As 2018 came to an end, the Federal Reserve under Jerome Powell was planning to reduce its balance sheet “on auto-pilot,” and probably raise rates a few more times as well. The juddering market sell-off that policy had prompted soon in turn prompted a change of heart, and the Fed went on hold as the year started. By midsummer, it had embarked on rate cuts, to be followed by a big increase in the balance sheet. That was to fix a problem with liquidity in the overnight money markets, and the Fed still insists that it is “not QE.” For the risk markets, however, it is QE. So, to Jay Powell: thank you.
U.S. Housing Is an ATM Again
That U-turn had further effects. By the end of last year, home sales were falling and the lengthy post-crisis increase in house prices was slackening. The Fed’s change of heart and a fall in the long-term yields that set mortgage rates was enough to return U.S. housing to rude health. As a result, consumers are more confident and more willing to borrow. So thank you for rising U.S house prices.
Populists Overplayed Their Hand
Boris Johnson in the U.K.:
British assets show no sign of recovering from the self-inflicted wound of the Brexit referendum. Once that decision had been made, there were only two options as far as the markets were concerned — either a negotiated exit or a departure with no deal, in which case there was a real risk of a sudden economic stop. The risk of “no deal” peaked, and British stocks reached a trough, when Boris Johnson took power and immediately embarked on a course that seemed designed for that outcome. He even enlisted the Queen to close parliament and make it harder for the opposition to come up with an alternative.
But he had overplayed his hand. Johnson suffered defeats both by the courts and by parliament, and came up with a deal that the EU and many in the UK find acceptable (at the price of accusations of treachery by the unionist population in Northern Ireland). Johnson now has a good chance of winning a five-year term as prime minister in next month’s general election. But without his clumsy start to his time in power, a “no deal” exit might easily have happened by accident. So thanks for that, Boris.
Matteo Salvini in Italy:
As the year began, the Italian economy was a mess, and the right-populist League of Matteo Salvini was rising to dominate its governing coalition with the left-populist Five Star Movement. Salvini was clearly the country’s most popular politician, and seemed determined to force a confrontation with the EU over Italy’s budget. He wanted to abandon austerity. Political risk, as shown by the spread of Italian BTP bond yields over equivalent German bund yields, ballooned once the coalition took shape in the summer of 2018.
But then Salvini miscalculated, withdrawing from the coalition only to see the left-center Social Democrats take his place in government. Italian politics remained as messy as ever, but a huge risk to the survival of the euro had been removed. Individual judgments matter: Grazie, Matteo.
Donald Trump in the U.S.-China Trade Conflict:
Any number of intraday market gyrations have been driven by news about the U.S.-China trade dispute. The important point for which all investors need to be thankful is that the market, collectively, doesn’t believe Donald Trump. His announcement of $200 billion in new tariffs, made by tweet on Aug. 1 with no warning, caused a major global market spasm. As the chart shows, stocks with the greatest China exposure suffered most. But both the World index and the 100 most China-exposed stocks within it are now higher than they were at the end of July — and the China-exposed stocks continue to outperform.
There are dangers. There is little or no evidence that the two sides have the building blocks in place for even the beginning of a trade peace. Longer-term issues of technology and intellectual property look intractable. But somehow the narrative has taken hold that the trade dispute will come to nothing. For that, we need to thank Donald Trump, and the continuing difficulty many have in taking him seriously. Thank you, Donald.
American Consumers Held Their Nerve
While investors cannot take Trump seriously, markets should be thankful that consumers appear to take him at his word. Sentiment in the manufacturing sector is weak, and has tumbled this year — as shown by a fall in the benchmark PMI purchasing managers index below 50, which signals the dividing line between recession and expansion. The market impact would have been much greater had it not been for remarkably strong consumer confidence.
The news here is mixed. The Conference Board’s measure of consumer confidence, shown in the chart, appears to be tipping over, even if it remains at a high level. But the continued willingness of American consumers to buy stuff is unquestionably helping to support markets. Thanks, guys.
OPEC Doesn’t Control the Oil Price Anymore
In case you hadn’t noticed, the Middle East is as precarious as ever. You might not have noticed if your prime interest is investment, however, because turbulence in the oil patch is no longer as damaging as it used to be. Thanks primarily to the growth of fracking in the U.S., and also to alternative energy sources, the OPEC oil cartel isn’t as powerful as it used to be. That makes life much easier for everyone.
Exhibit a) was the drone attack on a Saudi oil facility in September, which was the biggest sudden disruption to global oil supply on record, eclipsing even Saddam Hussein’s invasion of Kuwait in 1990. Crude prices shot up. And then, even amid fears that the incident could bring Iran and Saudi Arabia into direct conflict, they slid back again. Energy sources have diversified so much that a horrific moment need not disrupt markets that much. Thanks to the world’s oil producers.
Inflation Stayed in a Box
Central banks get a lot of criticism, and with good reason. But if we think their prime job is to control inflation — and it is — it is hard to complain about the job the Federal Reserve has done. Core inflation has risen a little above the 2% target in recent months, but the overall pattern is clear. Both consumer price inflation and the bond market’s expectations for the future remain remarkably stable.
OK, there are caveats. House prices are rising. The cost of tuition at American universities is going through the roof. And so on. The price of maintaining a place in the American middle-class is rising in a way that the inflation figures don’t reflect. And there are dangers in taking victory for granted. If inflation returns, that would be a serious “pain trade” as almost nobody is positioned for it. But for now, thank you central bankers (really) for keeping inflation corked.
Be Thankful You’re Not Macy’s
No company sums up Thanksgiving Day more than Macy’s. The U.S. department store sponsors a Thanksgiving Day parade that ends at its flagship Manhattan store. It is nationally televised, and features giant balloons of many famous cartoon characters.
This year, Macy’s might be particularly grateful for the free publicity. Of the 500 stocks in the S&P 500, it has done worst so far this year. Faced by the growth of internet retailing, Macy’s appears to have been worse affected than many of its competitors. And in a particularly cruel twist, there is a risk that high winds might force the company to give up on the balloons. It is a tough and ironic fate, but as they watch the parade on Thursday morning, Americans should say thank you for not being Macy’s.
