U.S Market Commentary: Strong Economic Rebound 2nd Half 2019

GDP / Economy

Despite a beginning of the year slowdown in growth, leading economic indicators are picking back up and giving us confidence in a strong rebound in the back half of the year.

And despite recent strong employment numbers, we are closely watching areas like factory workers and trucking, which are leading indicators of job data and which experienced their first drops in quite some time.

What We Like – Housing, REITs

We think housing could be a bright spot for the economy in 2019 and it’s one that most economists are sleeping on. With the Fed out of the picture and growth moderating, mortgage rates should stay around four percent for the remainder of 2019 and there is obvious appetite from prospective buyers at these levels.

Specifically, we think new home sales could surprise to the upside and get to near double-digit growth this year. Because of this, we continue to view housing stocks as particularly attractive, with Floor & Décor and their unique market share stealing business model at the top of our list of companies to own.

REITs are also attractive in this low interest rate environment—their balance sheets have never been stronger and despite a recency bias that continues to cause investors to call for a real estate crisis around every slowdown in the economy, we think real estate fundamentals are strong enough to weather a storm.

Political Unrest and U.S.-China Trade Relations

Political unrest across the globe is what we are watching closely to catch shocks to the system that could occur in the midst of this slowdown and lead to a recession.

The continued shift away from globalism has upset the apple cart - the way capital has been allocated over the last few decades. The ripples of this are showing up across Europe and causing major problems for the biggest growth driver of the global economy, China.

Now that the Fed is out of the way, we, like many others, see the China-US trade situation as the biggest risk to the global economy.

Because of China’s artificially engineered economy and insane levels of corporate debt inside of their state-owned enterprises, we don’t see how they can give the U.S. much of what it wants without imploding their own system.

As the trade war wears on, their dollar liquidity crisis is getting worse and if not for massive first quarter stimulus, their economic growth rate would be in a freefall.

The U.S. must thread the needle of being tough on China and getting some real concessions, while also realizing that trying to get too much would only serve to blow up China’s fragile economic system and send the entire world into a deep recession.