Sifting through the Clutter

We all complain that so much is happening so fast these days it’s hard to keep up. The plethora of events that could have a negative impact on the financial markets is being ignored in the United States, however, and investors seem to be assuming that everything going on will somehow be resolved favorably. The S&P 500 index is up 15% so far this year in spite of a world-wide economic slowdown and political turmoil in the United States, the United Kingdom and almost everywhere else. To reflect on the major issues facing the markets and their possible resolution, however, is useful. In the end, I expect that earnings and interest rates will be the determining factors and that geopolitical issues will cause temporary angst but not have a lasting effect on market performance.

At the beginning of the year we anticipated that the S&P 500 would be up 15% in 2019. As the year began, the index was selling at less than 15 times earnings and investor sentiment was clearly negative. These were near-perfect conditions for, at the least, a strong market rally. Now the index is selling at 18 times trailing earnings and sentiment is optimistic, which would suggest that equities might have a more difficult time between now and year-end. If the events I discuss below don’t work out favorably, we can expect some market turbulence going forward. To start, perhaps considering a few important developments that have gone right in the last few months would be worthwhile. The Federal Reserve has decided to pause on its policy of raising interest rates and shrinking its balance sheet; the government shutdown has ended; there is some better economic news out of China, which is the primary engine of world growth; and inflation has remained low almost everywhere. There are some signs that the second half might be better for the U.S. and Europe.

So what are the issues worth a look? Here are a few: the yield curve inversion, the Affordable Care Act, Brexit, the 2020 election, friction in the Democratic Party, the Chinese threat to American competitiveness, the timing of the next recession, Federal Reserve policy this year, the direction of oil prices, European growth, the dollar, government debt at all levels, climate change and why have we had no inflation in major developed economies.

I will try to cover most of these issues while providing some analytical support for my views, but this is primarily an essay designed to express the opinions of Joe Zidle, our Chief Investment Strategist, and myself (designated by “we”) or just myself (designated by “I”). Each section is covered in a deliberately provocative way to spur you to respond mentally with your own view. The positions described are those of us in Blackstone’s strategy group and do not reflect the opinions of the firm itself. Each is covered briefly; any one of them could well be the main subject at a monthly essay in the future.