The opinions of the investors of the world are averaged and expressed in the various indexes of major world markets, especially the S&P500. They have recently (just a month ago) pushed the S&P500 index to a new record high (2945 on 30-4-19). And the data coming out of the American economy is confirming their optimism. The US economy grew by 3,1% in the first quarter of 2019 – easily beating the average forecast of 2%. A good chunk of that growth came from private consumption expenditure (PCE) – which shows that consumers are spending. This is not surprising given the better-than-expected results from the S&P500 companies and the extremely low unemployment in America. At the same time, the US economy added 263 000 new jobs in April month – easily beating analysts’ forecasts of 190 000. This brought the unemployment rate down to 3,6% – its lowest level in 50 years. Hourly earnings growth was up 3,1% year-on-year at an average of $27,77.
So with all this good economic news flying around why is the S&P falling? The answer is quite simply Donald Trump. His aggressive attitude towards America’s traditional trading partners and particularly China is beginning to unnerve investors. More and more analysts are starting to talk about some kind of recession. The Trump tariffs are starting to bite.
A trade war makes no economic sense from any perspective – any economist will tell you. Everyone ends up losing. Aside from the tariffs on $200bn worth of Chinese goods, Trump last week announced a 5% tariff on imports from Mexico, effective 10th June 2019 and which would grow to 25% unless the Mexicans stopped illegal cross-border immigration into America. At the same time Trump has threatened around $200bn worth of additional taxes on Americans and put the United States-Mexico-Canada agreement (USMCA) into jeopardy. These factors are causing some investors to decide to sell out and await developments. In our view, Trump is feeling more and more pressure from the Democrats and the rising possibility of an impeachment. He is cornered and potentially dangerous. But can he really derail the economic boom in America? We don’t think so. In our view, the escalation of the trade war is probably temporary and in a few months’ time it will be history. It is far more likely that Trump is trying to use his executive powers to gain political points – or at least he is trying to distract Americans from his mounting personal problems. Read More