The Federal Reserve’s Open Market Committee met last week and lowered the federal funds interest rate by 0.25 percent. This is the third meeting in a row in which they have lowered the rate, and this time they changed their comments to suggest that this may be it for now.
Meanwhile, we got a pretty good jobs report telling us that the economy added another 130,000 jobs in September. The unemployment rate is 3.6 percent. We also saw some decent wage increases. So…the economy is all good, right?
Well…the glass is half full, or is that half empty? The consumer is and has been doing great. The slowdown in the economy has been driven by business investment, or the lack thereof, and the slowdown in business investment has been driven by uncertainty in international trade. The stock market seems to understand that, even if many who pontificate about the market do not.
When the news from the China trade negotiations goes poorly, as was happening in the beginning of August, the market drops; things get quiet or there is some good news on that front and markets go up, as they did in late August. This same pattern occurred in September; in October the announcement was made that a deal is all but done, and markets rose.
If this proclamation proves true, we suspect the bull market to continue, but if it proves premature, then down we will go. We seem to have a handle on how the trade war is impacting the stock market, but the unanswered question is, how is it impacting the real economy?
The fear of the trade war is that the combination of real tariffs and the uncertainty caused by the negotiations would actually put the economy into a recession. The official definition of a recession is two quarters in a row of negative economic growth. Are we close to that actually happening? No we are not, but for years after we were officially out of the last recession, polls suggested most people disagreed with the official definition.
Things are slowing down. Most companies who still provide guidance have guided for slower levels of growth. However, they are not predicting actual declines, which is what many feared not that very long ago. Maybe we have avoided a recession for now, and that is a good thing for now.
Recessions used to happen much more frequently. The economic cycle from recession to recovery to boom and back to recession used to be approximately five years. The economic expansion in the 1980’s broke that cycle and was the longest ever. We had a shallow recession in 1992 and then we went on a new expansion that was the longest ever. Then we had the lost decade of the 2000’s marked by a dot-com bust on one end and a financial crisis on the other. Now we are in the longest expansion ever.
Will it go on forever? No, but it does not appear to be ending now. Many will give the Fed credit for that – “their three rate cuts saved us.” I rather doubt that explanation; low interest rates cannot overcome structural impediments, and tariffs are structural impediments. The key to continuing our expansion is trade. If we get a truce, we can limp along. If we get the improvements we were promised, then we could pick up lost steam. Anything in between would be just fine.
All the while, we continue to make investment decisions from the bottom-up. That is what prudent investors do.
Chuck Osborne, CFA