Economic Update – December 2019

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Optimism pervades year end

– Collective opinion that a US recession was imminent vanishes
– US Fed firmly on hold
– Westpac gets caught up in money laundering scams

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

A TV segment aired on CNBC (November 25th) declared that the recession fears starting on August 14th had been set aside. Readers might recall that we never thought the so-called ‘yield curve inversion’ phenomenon that started this round of fear had any merit. As a result, our investment strategy has been unchanged during this three-month period while some others had to correct their thinking twice.

We, of course, know we can make the wrong call from time to time so we do not stubbornly hold on to a position. Rather, we take heightened interest in all other signals and arguments until the scare passes.

With the US Federal Reserve (“Fed”) firmly on hold for the foreseeable future, the tariff war abating, and the official US GDP growth being revised upwards from 1.9% to 2.1% for Q3, there is less to worry about into the end of the year.

We do have to keep an eye on the proposed December 15th tariff hikes flagged by Trump. The consensus is that they won’t take place at all or will be scaled back.

While we agree that Trump will get a Phase 1 deal done some time, we now don’t think he will want to do it too quickly. Rather, he might like to keep the window between a deal and the election in November short enough so as not to allow for any close scrutiny of the merits of the deal before the vote.

The US jobs data released in November were much better than expected but expectations had been set particularly low because of 46,000 GM workers being out on strike. There was no value in that data outcome but wage growth was stronger and the unemployment rate stayed close to the 50-year low.

Moreover, US housing data were strong and retail sales beat expectations. Three large retailers (Target, Lowes and Macy’s) reported earnings much better than expectations. The US consumer remains strong and the consumer accounts for about two-thirds of the US economy.

At home, some greeted our jobs data with a heavy heart. While total employment did fall for the month, the headline data is quite volatile. The official trend data was not only for jobs growth but a slight uptick in that rate of growth.

Scott Morrison flagged an acceleration of $3.8bn worth of infrastructure spending but announced no new tax cuts in the near future. The Reserve Bank is thought to be considering monetary stimulus measures including rate cuts as the Australian economy continues to experience anaemic GDP growth.

The stock market was rocked by Westpac having had 23 million breaches of the money laundering rules. All four big bank stock prices took a hit on the day and for some days to follow. Since the banks are about one third of the ASX 200, lots of investors were affected. Nevertheless, the ASX 200 came within a whisker of a record 6,900 at the end of the month.

For a change, the news from Europe was encouraging (or at least less discouraging). Germany avoided a recession and a general election in the UK was called for December 12th. The incumbent Tory party, led by Boris Johnson, is well ahead in the polls. While there is now less faith in the accuracy of polling, it looks quite possible Johnson will get an absolute majority (unlike the present government that relies on a number of Northern Ireland MPs) that might help force a conclusion to the Brexit situation.

Whether or not Brexit is a good idea, the current uncertainty about the future of the European relationship is crimping investment intentions.

With the S&P 500 and the ASX 200 recently hitting new highs, and views about future policy changes are moderating. We continue to hold our view for modest to moderate growth in both markets while interest rates will remain low for some time.

Asset Classes
Australian Equities

The ASX 200 had a strong month recording gains of around 3%. The Financials sector fell around 3% over the month because of the Westpac crisis. Most other sectors did very well indeed. We have the index only a fraction over-priced. Accordingly, we continue to maintain our focus on earnings quality and await a pullback in market index levels before we consider bailing out of this major bull-run.

Foreign Equities

The S&P 500 also had a strong November gaining around 4%. The world index grew around 3% in November. We also have the S&P 500 only a fraction over-priced.