The number one focus of broad markets, politically, will be on tax policy – none of Vice President Joe Biden, Senator Bernie Sanders, Senator Elizabeth Warren, Mayor Michael Bloomberg or Mayor Pete Buttigieg have stated to have wildly differing views on China than the sitting President but all have a bias towards changing or repealing 2017’s Tax Cuts and Jobs Act (TCJA). “Phase Two” of U.S.-China talks will likely be a focus in 2021 and thereafter as China will want to know who the President is before discussing the more sensitive issues like rampant state subsidies.
That’s not to say there aren’t concerns. If the Democratic primary shapes up as Senator Bernie Sanders or Senator Elizabeth Warren looking likely to win the nomination, that may be a negative for markets. Meanwhile a continuation of China’s slowdown would likely exacerbate weakness in manufacturing especially in Europe’s Germany and could do damage to the widely held view of a slight pickup in global growth. And while conflict with Iran seems to have been avoided, further developments in the Middle East are certainly possible.
Any of the above would do damage to the market PE multiple and investor sentiment, but we view the likelihood of a prolonged market selloff as low. Any downward movements in markets are more likely to be a repricing than a meltdown. We hold this view because of just how solid the underlying economic numbers in the United States currently are.
Last year, despite all the negative headlines the general theme was stable. Even in the face of ratcheted trade tensions, higher tariffs, weakness in global manufacturing, slowing global growth, and a lack of stimulus from tax legislation, the United States economy is expected to have grown at a 2.3% rate in 2019. Nearly $500 billion in additional income was created for American workers between 3Q18 and 3Q19. That’s larger than the entire GDP of Ireland, the 32nd largest economy in the world.
It’s important to note that slower growth is still growth, and with growth comes progress. Over the last 30 years we’ve seen technology go from a transformational development to an overlay over the entirety of world society. This transformation is only accelerating as time goes on. Just over the last decade, the smartphone progressed from a brand-new technology to practically a utility. Today’s tech companies provide “Technology Staples”, services that are key to modern society and for many people are integral to daily life, and the advent of Fifth Generation (5G) networks offers promise for even deeper integration.
Sources: PovcalNet (online analysis tool), World Bank, Washington, DC, http://iresearch.worldbank.org/PovcalNet/. Note: PPP = Purchasing Power Parity.
The emergence and subsequent ubiquity of technology has had a profound effect on global life and socioeconomics. In 1990, according to World Bank, World GDP sat at $22.6 trillion with 1.9 billion people living in extreme poverty. Today, World GDP is over $85 trillion with an extreme poverty level that is estimated at less than 700 million. In less than 30 years more than 1.2 billion people have been lifted out of poverty and World GDP has grown nearly 4 times over.
Over this time, we’ve seen the U.S. economy become significantly more resistant to external shocks, exhibited no better than its move from incredibly dependent on foreign oil to a net exporter. In September, an attack on a Saudi Arabian oil field knocked 5% of world oil production offline and prices at the pump hardly moved – while recent escalations in Iran only modestly moved global oil prices. That’s a remarkable turnaround from the 1990s and 2000s and a testament to the rise in American energy production.
In a broader perspective, we are firm believers that ‘God and nature are long’ – that in the absence of war or significant natural disasters, growth in productivity and population along with technological innovations will improve people’s standards of living and create more wealth for all habitants of this earth. There’s still plenty of growth opportunities in today’s world for multinational corporations. For example, 21% of India’s 1.35 billion people are estimated by World Bank as living in extreme poverty, while just over half of the world’s population has a connection with the internet.
Investing is about time in the market, not timing the market. Since 1946, the S&P 500 has averaged 11% annually and overcome 11 separate recessions, 5 wars, and 13 presidents. Over the last 2 years, the S&P 500 delivered an annual return of 12%, despite the hysteria and generally overdone selloff in 2018.
Where you stand depends on where you sit, and we encourage an approach that recognizes news has a regional bias but reality has a silver lining. In 2018, if you only watched market moves and media headlines, the entire global economy was on the verge of a collapse. That proved to very much not be the case and the following year was one of the best on record. Investing is a long-term game, and having a rational head and a steady hand helps prevent lackluster decisions driven by emotion. As investors, we should aim to be more confident than those who are fearful, and more nimble than those who are complacent.