Recent U.S. economic data has been reasonably good. October reports for retail sales, existing home sales, new home sales, and durable goods all exceeded consensus expectations. In addition, 3rd Quarter GDP was revised up last week from 1.9% to 2.1%. Combing the GDP upward revision with other upbeat October reports, Chris Rupkey, chief financial economist at Mitsubishi UFJ Financial Group told CNN that this tells “the story that recession is nowhere to be seen and should not be on anyone’s radar in 2020.”
We agree. Barring a complete collapse of negotiations with China and significant new barriers to trade, we expect the consumer to do their part to keep the ball rolling. Speaking of the consumer, one reading on our list of indicators that didn’t improve was consumer confidence. At 125.5; however, that reading remains high and should support a strong holiday shopping season. Early indications are good, as several retailer websites increased temporarily on Thanksgiving Day and Black Friday due to high costumer volume. Cyber Monday online sales hit a record $9.4 billion.
Perhaps feedback from a familiar name will drive home the point on the current state of the economy. In testimony to Congress on Thursday, November 14th, Fed Chair Jerome Powell gave his opinion. “The US economy is the star economy these days,” said Powell. “There’s no reason that can’t continue.”
So, does good performance this year lead to bad performance next year?
There are some reasons for concern. The global economy is stuck in neutral. Aging demographics and weak productivity growth are just two of the reason why. The trade war is not over. Even if phase one of the China deal is signed, focus will shift to Europe as well as the withering USMCA (Mexico & Canada). Brexit and Hong Kong are two examples of geo-political risks that are contained to the markets’ satisfaction today. Both situations are obviously volatile and multilayered.
That said, there are a number of good arguments for why investors can continue to win in 2020. The U.S. economy remains solid, if not spectacular. The consumer is the key at 70% of the overall economy. Lower-wage workers are seeing wage gains in today’s job market. Central banks have not solved the slower growth problem, but they have managed to reduce risk or recession worldwide. Recessions are market killers. Corporate earnings are in a good spot. Presidential comments and tweets notwithstanding, there appear to be genuine progress on trade talks. In fact, due to election year forces the heat is on the Trump Administration to sign at least Phase One of the trade deal as the 2020 election gets closer. Historically, reelection of an incumbent president hinges on the economy. According to a table produced by The Wall Street Journal, over the past century an incumbent president was re-elected in all cases when there was no recession in the previous two years. By signing a Phase one agreement with China, the risks for a recession fall even further.