As we head into the last quarter the broad Morningstar index is up 10.51% YTD and, again, growth has the lead over value. We may be in a Goldie Locks economy: not too hot and not too cold. By almost every measure the economy is growing nicely and we have left behind the anemic growth rates we have had for years. Mortgage delinquencies are at rock bottom levels; employment with minorities are at all-time highs; the ISM (Index Supply Management) non-manufacturing index is at an all-time high; incredibly, EXPORT orders are up, and, finally, the optimism index is also up. However, these are balanced by worries of a trade war and the length of the current bull market. I will attempt to address both these worries.
The current market has passed the last longest running bull market as counted by number of days. So, yes, it is long in the tooth, but when, measured in other ways, we still have a way to go. In simple price appreciation, this market lags seven other bull markets, and in price appreciation of the S&P, the 1990 to 2000 run still has the current expansion beat. The aforementioned economic indicators imply this market also has room to advance.
Next is the potential for a trade war. In the last quarter's letter I shared my view on this. It remains the same with two notable changes. First, Canada and Mexico have signed a new, renamed NAFTA agreement: USMCA. So the Mexico and Canada issue is now settled leaving only China as a potential problem. USMCA has provisions that provide for higher wages in Mexico and Canada. This will have two beneficial effects. First is an expansion of the Mexican middle class. Mexico will experience a significant rise in standard of living, which may ease some of the immigration issues with the U.S. Second, our workers can now compete effectively with the previously lower wages being paid by Mexico. This applies mainly in the auto parts and supply businesses. Another notable provision of the agreement is the opening of our dairy market to Canada, which was previously severely restricted. Our share of the Canadian dairy market is only 3.4% now, but even that low percentage drops off in several years. I suspect there are other provisions that are positive to the US but are not being discussed in the same way the Mexican provisions are not being discussed. I am waiting for someone else the read all the details so I don't have to read the hundreds if not thousands of pages in the new agreement. The bottom line is we get a lot of the changes we wanted with Mexico and Canada.
China is still a problem and I now think that intellectual property theft is a bigger problem with China than the U.S. budget deficit. If you google "China stealing intellectual property" you will find article after article discussing this. What happened to DuPont is alarming and should never be allowed to happen again! Essentially, China confiscated all the computers and private access codes to the formulas for some of DuPont's most profitable products. As a result, China is now making knock offs of Dupont's products and is no longer sharing the business as agreed to with the U.S. It also adds to our trade deficit. This long-term combination of deficit and theft of property should be addressed by Congress, even if it is painful to some. However, given the aforementioned positives, I think we have a way to go yet in market growth and I am, for now, optimistic.
Willis G. Ashby, President and CFP®
Integra Financial, Inc.
References: TD Economics, Morningstar, BMO Global Research, Wall Street Journal