Dining with 'Deplorables' Dining with 'Deplorables' https://stage-fii.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png https://stage-fii.federatedinvestors.com/daf\images\insights\article\restaurant-table-small.jpg January 24 2020 January 24 2020

Dining with 'Deplorables'

It was a pro-Trump crowd in Naples, although the subject of impeachment did come up.
Published January 24 2020
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This week, I returned for my annual Naples trip, where I met with snowbirds from Chicago. My luck—the coastal Florida city had its coldest day in two years. This very conservative crowd was unabashed about its politics. At a dinner, I mingled among the tables. “I’m a proud ‘deplorable.’ ” And “I’m a proud Walmart shopper.” And “Welcome to the Trump table!” No wonder, there’s money down here. I remarked about a Bentley I saw, and was informed, “Bentleys are like Chicklets. They’re all over the place.” And for the first time since impeachment became likely in mid-September, a gentleman asked about its possible affect on the market. Washington Analysis believes that the markets are putting too high a probability on Trump being re-elected and puts the odds at 50/50 despite the advantages of incumbency and a strong economy. It notes the last two times impeachment occurred (it includes Nixon even though he stepped down before he was impeached), the American public chose the president of a different party in the subsequent election, even in Clinton’s case when the economy was doing very well at the time.

Everyone is aware that everyone is bullish, and everyone is concerned. The Mister joined me for the weekend prior to my business meetings, and we visited with friends. Several asked “Linda, not to talk shop but what should we do with our stocks here? Should we sell?” Melt-ups such as the 16% we’ve experienced since early October do tend to be accompanied by mild 2-4% corrections. With market sentiment this hot, anything can be an excuse for a pullback. Coronavirus? But major tops almost always are preceded by a weakening of trends and cracks in credit, neither of which is remotely the case today. And it’s next to impossible to time a pullback (you have to be correct twice). In economics, a Giffen good is a product that consumers buy more as the price rises, contradicting the law of supply & demand. Renaissance Macro sees stocks exhibiting Giffen-like characteristics, with demand highest at their most expensive levels. The inference: it would be wise to buy on any weakness rather than sell on expectations of correction. As bullish as Wall Street is, Main Street is not. Net inflows into bond funds and ETFs surged a record $24.7 billion in the year’s first week, while equity funds experienced similar outflows. Both trends continue. A gentleman at one of our luncheons asked, “What will help to lift consumer confidence?” I insisted confidence actually is very good. He seemed dubious. Still, he’s wrong. Michigan sentiment is in its 88th percentile and Bloomberg’s gauge is at a 20-year high, just shy of an all-time record. These surveys cut across big cities and small towns, rich and poor, old and young, etc.

Given its sensitivity to rates, employment, confidence and demographic trends, housing tends to be a good proxy for equity markets and the economy. Right now, it’s going strong (more below). There’s ample liquidity, too, as the Fed, European Central Bank and Bank of Japan are on pace to collectively expand their balance sheets by $1 trillion this year and, after cutting them significantly last year, have committed to keeping global short rates very low. Cornerstone Macro posits that S&P 500 earnings, which have a high correlation with the dollar going down (it has) and the global PMI turning up (it has), already have inflected higher, suggesting significant upside in 2020. In my travels, I note that no matter how interesting our politics or uncertain our trade policies, the amount by which earnings recover from 2019’s flat results will determine how this market trades. Our welcome at each investor event this week was wonderful. (And they pay me for this!) At a dinner event, a lady remarked, “You don’t even look to be 30-years-old.” (Pretty dim lighting, but still!) And from a stranger in the elevator at my hotel, “You look like an actress.” My visit to Naples went by too quickly. The Mister thinks we should move here!!!

Positives

  • Lots of millennials will require lots of homes A week after starts for the month jumped to a 13-year high, December existing home sales shot up nearly 11% year-over-year (y/y). And with inventory at historic lows, home prices climbed almost 8% y/y.
  • No one’s talking recession This morning’s flash PMI composite gauge rose more than expected, led by the highest reading in services activity since last March. Moreover, the capacity rate in manufacturing was a not-too-hot 77% in December—the U.S. economy never has had a recession without it being at least 80%.
  • A global synchronized soft landing Overseas, the eurozone manufacturing PMI hit a 9-month high in January while the U.K. composite gauge jumped back into expansion territory. Earlier this week, Germany’s ZEW economic expectations survey came in at its highest level since 2015.

Negatives

  • What do they know that we don’t? Unlike elevated consumer sentiment, CEO confidence has fallen into recession territory, the Conference Board said. A PwC survey of global CEOs released at Davos this week found 53% think growth will slow in 2020 vs. 22% expecting improvement.
  • Maybe CEOs are too cautious? Job openings have fallen nearly 11% in the past year, their worst pace since 2009. Openings typically are viewed as a proxy for business confidence, suggesting businesses overestimated the hit from tariffs as employment growth and hiring remained strong.
  • Leading indicators fall again The Conference Board gauge declined in December for the fourth time in five months, but three of the big negative contributors—jobless claims, ISM new orders and building permits—likely will prove temporary. Claims already have pulled back and both the Phase One deal and high builder confidence suggest new orders and permits, respectively, will soon rise.

What else

Trump's ‘Beautiful Monster’ is more than just a phase The U.S.-China Phase One deal is designed to create enough of a boom to re-elect Trump, Trend Macro says, as it seems comprehensive enough to silence critics who will say he "caved" with enough immediate economic impact to trigger stronger growth. The investment research firm estimates it could add as much as 0.36 points to GDP this year.

China is rapidly emerging as the world’s largest nursing home Yardeni says China’s rapidly aging demographic profile is a key reason its retail sales growth keeps trending down—5.1% y/y in December, its lowest on record. Urbanization is depressing fertility rates, as is the lingering effects of China’s 1-child policy that lasted from 1979-2015. The number of babies born in China fell last year to a 70-year low, with projections showing people over 60 will account for a third of its population by 2050.

I’m loading up on popcorn In the last two competitive Democratic primary contests, the candidate who won in Iowa got a roughly 30 percentage-point boost to his or her market-implied probability of winning the nomination. The field typically winnows significantly after the caucuses, but given both the number of candidates and the fairly high level of competitiveness, several campaigns may continue another month, when the cumulative share of pledged delegates jumps to nearly 40% after Super Tuesday on March 3.

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Tags Equity . Markets/Economy . Politics .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Bloomberg Consumer Comfort Index is based on weekly telephone survey of consumers seeking their views on the economy, personal finances and buying climate.

The Conference Board's Composite Index of Leading Economic Indicators is published monthly and is used to predict the direction of the economy's movements in the months to come.

The Conference Board surveys CEOs at major companies quarterly to gauge their confidence about the economy.

The Global PMI is compiled by Markit Economics and is derived from surveys covering more than 11,000 purchasing executives in 26 countries.

The Institute of Supply Management (ISM) manufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Markit Composite PMI is a gauge of manufacturing and service activity in a country.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

The ZEW Indicator of Economic Sentiment polls financial experts to gauge whether they are optimistic or pessimistic about the subsequent six months.

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