April 4, 2019

Economy Continues To Show Signs of Slowdown

Last week, further signs of economic slowdown emerged as the Commerce Department issued a downward revision to the fourth quarter 2018 estimated economic growth. Fourth quarter gross domestic product was revised sharply lower from 2.6 percent to 2.2 percent, which, among other factors, underscored weaker spending by both the consumer state and local governments. The result was another sharp move lower in U.S. interest rates.

Among our second quarter key investment themes is the caution—be ready for slowing earnings. We will cover this declaration in more detail later, but to highlight our point, the markets have been unforgiving to companies that miss earnings, and there are enough excuses in the first quarter for corporate management to hide. Excuses for missed earnings will likely include the global economic slowdown, weather, uncertainty around trade issues with China and Europe, and the government shutdown.

Another theme for the second quarter is the resolution of U.S.–China trade. We have written extensively over the years about the evolution of capitalism and democracy. The current issue is less about a trade treaty and more about how our form of capitalism competes with a central state sponsored form of capitalism that has no rules other than to serve its government. Our form of capitalism, for all its imperfections, attempts to serve investors, reward risk taking, and allocate capital efficiently. On the other hand, China’s form of capitalism is sponsored by a central state government which controls the rules and exists to serve its government; the government then, in turn, allocates resources to its people. At the risk of sounding overly dramatic, we are at war with China today. It is an economic war. The new U.S.–China trade treaty will establish a paradigm for trade and set the standard for how China competes in the global economy.

Finally, Brexit took an unusual turn last week as Prime Minister Theresa May offered to resign her position under the condition that parliament pass the existing withdrawal agreement. They’ve reached the departure deadline of March 29, meaning the date at which separation between Great Britain and the European Union was supposed to be made final. However, there is still no agreement among the British government and the European Union for the conditions under which Great Britain is permitted to leave the EU. As it stands today, it appears that the United Kingdom will leave the EU on April 12 without a deal. The uncertainty raises significant concern for investors as we expect that capital markets, banks and businesses are not adequately prepared for a sharp, abrupt exit. We would expect short term volatility spikes over the next several weeks and a renewed focus on the health of European banks.

Greg Hahn is president and CIO of Winthrop Capital Management.

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