While there are indeed other festering issues in play, the following — which is the close to our forthcoming commentary on general conditions in our year-end letter — speaks to what we see as the central issue, and (in the last paragraph) what is necessary if the current rout is going to be merely what amounts to a steep correction (a pause, so to speak), as conditions presently dictate, or something worse. In other words, while those other festering issues could morph into serious market headwinds, they pale in comparison to the long-term structural damage that a protracted trade war would inflict:
…. while anything can happen, the present setup morphing into a protracted bear market would be unusual, with history as our guide (although we remain open to all possibilities); which explains why we’re not at this point rotating to a defensive posture within client portfolios.
Lastly, and on a sour note, the following from a Christmas day article from Bloomberg Economics drives home why we see the “trade war” as THE macro risk going forward.
“By Enda Curran and Katia Dmitrieva(Bloomberg) — While 2018 was the year trade wars brokeout, 2019 will be the year the global economy feels the pain.
Bloomberg’s Global Trade Tracker is softening amid a fading rush to front-load export orders ahead of threatened tariffs. And volumes are tipped to slow further even as the U.S. and China seek to resolve their trade spat, with companies warning of ongoing disruption.
Already there are casualties. GoPro Inc. will move most of its U.S.-bound camera production out of China by next summer, becoming one of the first brand-name electronics makers to take such action, while FedEx Corp. recently slashed its profit forecast and pared international air-freight capacity.
“Any kind of interference with commerce is going to be a tax on the economy,” said Hamid Moghadam, chief executive officer of San Francisco-based Prologis Inc., which owns almost 4,000 logistics facilities globally. “And the world economy is probably going to slow down as a result of it.”
Financial markets have already taken a hit. Bank of America Merrill Lynch estimates that the trade war news has accounted for a net drop of 6 percent in the S&P 500 this year. China’s stock market has lost $2 trillion in value in 2018 and is languishing in a bear market.”
Recent data underscore concerns that trade will be a drag on American growth next year. U.S. consumers are feeling the least optimistic about the future economy in a year, while small business optimism about economic improvement fell to a two-year low and companies expect smaller profit gains in 2019.”
The good news is it’s probably not too late (but I fear we’re getting close) to do an abrupt about face (trade war truce) and see equity markets reflect a continuation of what was at the beginning of this year a globally synchronized, robust, economic expansion — although we should doubt, given the damage already done, whether “globally sychronized” and “robust” will be apt descriptions going forward.