issues for the S&P 500 in 2019:
–about half the earnings of the S&P come from outside the US. For 2019, that’s not a good thing, since China is slowing down (more tomorrow) and the UK’s ham-fisted approach to Brexit is stalling business activity in the EU
–in the US,
—-last year’s corporate tax cut is no longer a source of year-on-year aftertax earnings growth
—-tariffs continue in place. Tariffs redistribute, but in the aggregate also slow, economic growth. The current ones are designed to shift economic energy toward sunset (often private) industries and away from ones with better prospects. Some, like those on steel and aluminum, appear arbitrary, adding a layer of uncertainty to the whole process
—-the government shutdown is already pushing the US economy from a plodding advance into reverse, according to White House economists. The central issue is a border wall, which, if news reports are correct, was originally intended only as a memory aid for a candidate who couldn’t remember his key policy positions very well
—-the lack of sensible–or even coherent–economic strategy from Washington is making corporations accelerate domestic restructuring plans and to question future investment in the country. The administration’s hostility to admitting highly skilled foreign workers based on their religion/ethnicity is making the shift of r&d activity across the border to Canada an easy decision
In short, an embarrassing parade in Washington of own goals/self-inflicted wounds.
where to look for growth
The business cycle isn’t going to be much help. In times like this, the defensive sectors–utilities and telecom, and, to a lesser extent healthcare and consumer discretionary–typically come to the fore. But utilities + traditional telephone now amount to much less than 10% of the S&P. More important, both areas are in the throes of fundamental alteration that is damaging to incumbents. This leaves us with healthcare and consumer discretionary.
In both these areas, I think it’s important not to implicitly take a business cycle approach. A key factor here is Millennials vs. Baby Boomers.
In very rough terms, a Baby Boomer earns about twice what a Millennial does. But Millennials are entering a period of rapid growth in wages. In contrast, as Boomers retire, their incomes are typically cut in half. It seems to me that in all consumer areas it’s important to concentrate on firms that serve mostly Millennials, and avoid those (department stores are an easy example) that serve mostly Boomers, no matter what the level of current profits is.
My personal belief is that Americans don’t approve of making money from others’ illnesses. That’s the simplest reason (there are others) I can give for avoiding hospitals or nursing care or other healthcare service providers. But the premise of no business cycle help implies as well looking for smaller, more innovative, say, medical treatment development, firms …early-stage companies with the potential for explosive growth.
In the tech area–a more business cycle-sensitive area than healthcare–I think seeking out smaller, more innovative firms is also the way to go (but I always say this). In a so-so economy these should continue to prosper. The big risk is that they would likely be hurt very badly if the administration continues to add to the damage to the domestic economy that it is already doing.