Investment Strategy:  First Quarter 2020 – Specific Market Reviews: United States

• Economic data continues to be relatively stable; employment data is strong and the November PMIs for both manufacturing and services were above the crucial 50 threshold that shows that the economy is growing not contracting. There continues to be a huge divergence between business confidence (around decade lows) and consumer confidence (around record highs). Monetary conditions are very loose and supportive such that housing starts and mortgage applications have picked up sharply again. We are not expecting a robust economy by any means but one that is still rolling along quite nicely so if ‘lacklustre’ and ‘modest’ are the right words to describe the trajectory of growth they are certainly better than ‘collapsing’ or ‘recessionary’ which had been bandied about earlier last year. 
• The Trump impeachment on the grounds of abuse of power and obstruction of Congress is being ignored by the markets. The impeachment sets up a trial in the Senate, which it is assumed will then acquit him as it needs a two-thirds majority to convict, and the Democrats have only 47 of the 100 seats. 
• Three and done. After a third rate cut last year Fed funds are now down to a range of 1.5% to 1.75% and US Fed head honcho Jerome Powell is sitting on his hands, saying that policy is now ‘well-positioned’ with the risks to the economy subsiding following the trade wars truce. It would take some really horrible data for rates to be cut further from here.

• Not really a market thing, but a sadness of the Trump years has been his blunt ‘America First’ foreign policy that has unravelled the world order that America had built and sustained in the decades since WW2. The US is stepping back from being the global upholder of democracy and human rights and in a world where Russian and Chinese influence increases exponentially then ‘might makes right’ could become the unhappy consequence.
• S&P500 earnings are forecast to decline by around 1.5% in Q4 2019, which would be four straight quarters of y/y earnings decline, so whilst the economy may not be in recession corporate profits certainly are. This though was from a high base in 2018, which had been inflated by the Trump tax cuts and we are probably now at the trough of earnings decline with positive forecasts for each quarter next year and a forecast of 9.6% eps growth for the year as a whole. Note that this is a typical analyst tactic, firstly to be optimistic and secondly never to use a whole number which would look like a bit of a guess (which in fact it is). 
• Last year was an absolute bumper year on Wall Street with the S&P500 index rising a whopping 30%. However, this leaves the index trading on a rather expensive P/E of  18x future earnings which is just about sustainable if bond yields remain super-low and earnings meet expectations but should yields back up then the consequences of multiple contraction can be chilling.

Summary. Wall Street had a bumper year in 2019 on top of an already bumper decade.  A slowing economy, and a relatively expensive valuation suggest that the US could be a laggard rather than a leader this year in terms of return.