State of the Union
This week we heard President Trump’s State of the Union address, during which he called for a bipartisan push for an infrastructure bill and lowered drug prices along with continued spending on defense. While spending $1.5 trillion on infrastructure over the next decade was part of Trump’s presidential campaign, the passing of an infrastructure bill seems unlikely without raising taxes to fund this level of spending. In terms of defense spending, the government is expected to spend around $716 billion in 2019.
Moral of the story: Depending on the ability for Congress to play nice and actually make things happen, there are winners and losers in the stock market from this agenda. Construction and building materials companies (like JEC, ACM, FLR) along with defense contractors (like RTN, LMT, GD) should be set up to see gains while pharmaceutical companies (like PFE, AZN, NVS) could face significant pressures from pricing regulations.
On Thursday this week, the Bank of England slashed its economic growth outlook for this year from 1.7% to 1.2%, the slowest pace since 2009 because of uncertainty around Brexit and a slowing global economy (for those who need context, here’s an ugly reminder of what 2009 looked like). While the economy could pick up on the back of a successful Brexit deal, this slowing outlook for the world’s 5th largest economy doesn’t make me feel warm and fuzzy about the global economic outlook. Add to this, the Trump administration could threaten tariffs on European autos as leverage for cooperation on other fronts. Then moving to China, there’s uncertainty, again, on the progress of negotiations toward a trade deal as there is no meeting currently scheduled between President Trump and Chinese President Xi Jinping before the early March deadline.
Moral of the story: There is probably a slim chance of no resolution on the China trade front given that the trade war is hurting both economies at the moment. However, when there is so much uncertainty encompassing so many of the largest economies in the world, there’s bound to be a cloud looming over investors’ minds, which generally results in higher levels of risk aversion.
Earnings are here (part 4)
Earnings season continued this week as we heard from companies like Google parent Alphabet, Chipotle, and Twitter. While earnings continued to be healthy, management teams’ economic outlooks continued to be subdued because of concerns on slowing economic growth as well as rising expense pressures (because of the tight labor market, companies are having to pay up to keep their employees). This issue of expense pressures was on full display this week as two of the largest regional banks, BB&T and SunTrust announced a merger that will create the 6th largest US bank and achieve $1.6 billion in cost synergies (favorite buzz word?).
Moral of the story: So far this year, the stock market has rallied on the back of a massive correction at the end of 2018, supportive Fed policy, and relatively strong economic data. However, it seems like we’re finally starting to recognize, once again, the risks of slowing global growth at the same time as rising costs, trade uncertainty, and the potential for a second government shutdown. Time to err on the side of caution.