The Bricks in the Market’s Wall of Worry…

Stocks fell out of bed recently after US Commerce Secretary Wilbur Ross said that trade negotiations with China were far from complete.

“We would like to make a deal but it has to be a deal that will work for both parties,” Ross told CNBC. “We're miles and miles from getting a resolution.”

A few hours afterward, Treasury Secretary Mnuchin suggested a softer tone:  That both sides were “making a lot of progress” in the talks. He added that he is looking forward to speaking with Chinese Vice Premier Liu He when the representative visits the US.

Is this a safe bet? 

Folks, don't get carried away with fears. Both President Xi Jinping and President Donald Trump need a deal to end their escalating trade war.

It will help both sides and calm the markets.

The US Government Shutdown?

The deal didn’t get done until flights out of LaGuardia were all but stopped because air-traffic controllers were on the hunt.

My hunch is this likely convinced Trump and congressional leaders to reach a deal later that day to reopen the government for three weeks.

Maybe next time include Congressional salaries and pensions contributions in the shutdown mechanism and you’re pretty much guaranteed we’ll never have this problem again.

And About that Wall?

It’s an argument for another day and a political spectacle best described by Roger Waters of Pink Floyd when he wrote, “All in all it was all just bricks in the wall.”

Try hard to ignore it.

This too shall pass.

So is the "Flash Recession" Over Then?

Well, let's see…

Recent data out of Chicago was way better than expected.  Earnings at the point when 22% of the S&P had reported were up an average of 10% year-on-year. That’s better than the 6% to 8% we suggested would be the return to normal.

So is there nothing to fear but fear itself?

The ‘coming recession’ gambit is always a good piece for the media but not a very sharp conclusion at this point for long-term investors. 

There is some evidence that fear quickly worked to depress the economy - and some corporate plans - during December and January.

But here’s the deal: With Presidential Election campaigns right over the horizon, how much do you think we will hear about ways to "spur more economic growth."

You can bet planners have already mapped out the "wins" in the deal-making need topics above.

So let's just assume politicians will, well, remain politicians, and solutions will magically appear in time for the noted election runs ahead.

By the way, that's good news.

As to when the next recession may occur? 

Maybe the day after Election Day, November 3, 2020.

Now, this could indeed unfold if Trump is defeated in his bid for a second term by a Democratic candidate who promises during the campaign season to undo Trump’s deregulations and tax cuts. 

The Democratic Party continues to move to the left on all sorts of issues, including higher taxes on high incomes, a wealth tax, and lots of regulations under the so-called “Green New Deal” (GND).

Please don’t misunderstand me, as this is not intended at all to be a political judgment call or opining on the merits of the GND.

It merely suggests we be aware that an abrupt reversal of Trump’s relatively stimulating policies could trip up the economy and trigger a bear market.

For now, let’s review the US economy’s recent hits and misses:

• Leading indicators:  The Index of Coincident Economic Indicators (CEI) rose to yet another record high during December, gaining 2.1% y/y.  Dr Ed Yardeni provides a nice set of charts showing the record highs below:

On the flip-side though, the Index of Leading Economic Indicators (LEI) stalled in record-high territory during the last three months of 2018.

And the biggest negative contributor to the LEI were self-fulfilling ones, like the S&P 500. 

Another chart from Dr Ed shows the stall-out (upper left hand chart) during the fear avalanche:

As for jobless claims, they stand tall and are also a key component of the LEI above, as they fell again to 199,000 during the 1/19 week. 

This is the lowest reading since mid-November 1969, confirming that the labour market remains solid and supportive even as we fear all those so-called terrifying robots.

Business Activity? 

It was dinged a little even as CEO's reacted to the rapid onset of flash fires in the media. 

Note though that the average of the general business indexes tends to be highly correlated with the ISM M-PMI, which will be released through January at the start of February. 

Importantly, the Markit estimate for the US M-PMI climbed from 53.8 to 54.9 this month, boosted by the strongest growth in production since May 2018.

Trucking Remains Strong

 As we noted last week for you there was a pause; yet another sign of a "flash downturn" during December. 

The ATA truck tonnage index did fall 4.3% m/m during the month but the key is that it remains in record-high territory even after the dip!

All in all we suspect that we will now witness a few ugly reactions in the data to the panic which ensued in the markets in Q4.

This is understandable given the haunting concerns of a repeat of 2008-2009, which is always sitting idle just under the surface.

That fear will be present for decades.