Change

Things change quickly. Last month we were hearing so much about the “unmistakable pattern” of slower US economic growth. We were hardly in the minority. At press time, the consensus 1st Quarter 2019 GDP estimate was a paltry 1.3%. The “R” word (recession) was even being discussed, although most likely for 2020:

Since early April, three big things have happened relative to our analysis:

1st Quarter GDP (despite the effects of the government shutdown) came in at an estimated 3.2%, surprising almost everyone one on the Street.
Our “backstop” against recession, the Fed, continues to play its part… but not without a twist.
And now, after a few presidential tweets, the China trade front has exploded back on the scene, shaking equity markets here and abroad.

First, that 1st Quarter GDP number was a “Wow” moment. Not only did it turn the declining growth pattern on its head, it was the first time since 2015 that the opening quarter of the year reached 3% or more. At a time of lingering US Chinese trade uncertainty and weak economic data everywhere from Germany to Korea to Japan, strong US data acts as an insurance policy against further global economic weakness.

Other data points have been somewhat mixed, but certainly favor the upside. The most recent and the one that rightly got the most media attention was the April labor report. The 263,000 new hires easily beat the estimate of 190,000. Labor markets are very strong right now.

Last month we said the Fed is providing a backstop against slowing economies. Despite the fact that Chairman Powell disappointed some investors after the Fed’s meeting concluded last Wednesday by not announcing a rate cut; the Fed continues to be an ally for equity investors. We were never for cutting rates this year, and now the chances of the Fed reducing interest rates in the near future are slim to none.

Economic reports were better for many overseas economies last month. There are, as usual, some political concerns. US-China trade negotiations, as mentioned above, rose from their nap to remind us how influential they are over the global economic outlook and, in turn, equity prices. Things may get pretty ugly in the world equity markets over the next few weeks but we feel a trade deal between the U.S. and China will happen because it is in the best interest of both countries especially China.