2019 Will Be A Tough Year For Trump And His Economy
Let’s face it, the President of the United States will be Silvio Berlusconi’d in 2019.
Tailwinds from tax cuts should fade in 2019, but discretionary spending approved in this year’s monster budget remain
The long goodbye. Trump faces an endless onslaught of investigations in 2019 that will add to gridlock. The U.S. economy will be in the hands of the Fed and what’s left of fiscal stimulus from 2017. (AP Photo/Alex Brandon)
Let’s face it, the President of the United States will be Silvio Berlusconi’d in 2019. With the House now in control of his enemies, this year could be Trump’s swan song.
The House Democrats have the Special Counsel investigation on their side. And if Robert Mueller’s initial Russia investigation turns up zilch on Russian collusion to kick Hillary Clinton to the curb in favor of The Donald, then—like the Italians did to Berlusconi—they will investigate and subpoena Trump till Kingdom Come. Indeed, many top Democrats like California Representative Adam Schiff have already promised to do so.
Rumors and threats of pending criminal indictments are likely to last on and off throughout the year. Trump could still be impeached in the lower house but, like Hillary’s husband, survive in the Senate providing Trump’s approval rating does not look like French president Emmanuel Macron’s next year.
Worth noting, based on exit polls during the November midterms, healthcare was top of mind for voters. Going after Trump was in third place. Look for that to be flipped and healthcare to be an afterthought as investigating Trump proves to be a sexier news hook. Going after Trump will be issue No. 1 for the Democrats. Investors should expect that to add to the volatility next year.
Trump’s crowning achievement thus far has been the Republican tax cuts and regulatory rollback. The stock market responded to these policies by continuing into their ninth-year bull market.
The fiscal stimulus came at an unusual time, during a growth period (albeit lackluster growth), and is still expected to last at least until the start of 2020.
Tailwinds from tax cuts should fade in 2019, but discretionary spending approved in this year’s monster budget remain , BNP Paribas economists wrote in their recently published 2019 outlook report for clients.
The economy is Trump’s only saving grace, and one that may keep him away from Berlusconi’s fate.
The Market’s World View For 2019
If the stock market continues to rise and there is no recession, the U.S. economic expansion will be the longest since the 1991-2001 growth spurt under Bill Clinton. A strong U.S. economy is good for China and emerging markets like Mexico that depend on it for growth.
“We are now past peak momentum for the economy, but we have not yet passed peak earnings growth,” says Keith Wade, an economist with Schroders in London.
This year was tough for Trump politically, but his approval rating remains in the high 40s and is not much different from where Obama was at this time in his presidency.
The last quarter has been a scarier one for Trump’s economy. The major equity markets are all in the red year-to-date, with many major emerging markets down over 15%. European and Asian equity markets are recording double-digit losses.
Investors are either forgetting that 2019 is a growth year for the two biggest economies in the world—U.S. and China—or are focused on major central banks transitioning from free money to increased capital costs.
“The global liquidity cycle has peaked,” says Neil MacKinnon, an economist for VTB Capital in London.
The S&P 500 hit a record high on September 21 and quickly sold off in October because of hawkish comments from Federal Reserve Chairman Jerome Powell. Trump jumped down Powell’s throat. Then Powell started talking more dovish. In November at the Economic Club in New York, Powell hinted that the hiking cycle was coming to an end.
More rate hikes are expected this week, with one more in March. If the Fed hikes beyond that, then either the U.S. economy is growing at 3% or the Fed is not too worried about triggering a recession.
The Fed might not be worried, but the market will make them worry. The yield curve inverted during a trading session last week.
A weak economy, coupled with the constant barrage of negative news about the president, will drive Trump’s approval rating into the ground. He’d lose the center. And like the ex-Italian prime minister, a loudmouth son-of-a-gun in his own right, Congress would have their case for the American equivalent of a no-confidence vote: impeachment.
How close are we to a recession?
The 10-year Treasury yield/three-month Treasury bill spread is considered the “most accurate” on Wall Street for forecasting a recession. It has narrowed to 50 basis points from 102 basis points in early October and is likely to invert early next year if the market perceives more than one rate hike is coming.
In simple terms, the current yield-curve flattening means investors are becoming risk-averse. Growing pockets of economic weakness such as housing and auto sales, coupled with peak employment in September, gives the market some hope that the Fed will be dovish in 2019.
“Markets are vulnerable to fears that a downturn is near,” says BlackRock’s global chief investment strategist Richard Turnill. BlackRock doubts the U.S. will go into a recession anytime soon.
One reason for their doubt is that for all of Trump (and the market’s) concern about rate hikes, real interest rates are still near historic lows at roughly 1.5%. Minus the strong job market, there are no signs of economic overheating. Most signs point to ongoing economic expansion.
But then there’s this China trade war thing.
As Trump gets attacked from the left, with weak support from GOP party establishment figures, he may take out his frustrations through foreign policy. It’s the one area where he can exercise power without having to kowtow to Congress. That puts China, in particular, in the crosshairs.
A.T. Kearney predicted this week that trade frictions between the U.S. and China will intensify in 2019.
Trade risks are more fully reflected in asset prices than they were at the start of the year. But investors should expect new twists and turns to cause bouts of anxiety, like the recent arrest of a senior executive from Huawei, China’s leading telecommunications systems corporation. Most of this is just bad for sentiment. Huawei is not publicly traded.
The only issue Trump may be able to reach across the aisle on in 2019 is Chinese trade.
Likely incoming House Speaker Nancy Pelosi has been critical of China mercantilism before. She will likely take up the Democratic Party’s favorite foreign policy meme—human rights and labor concerns—to go after Beijing if her Bay Area constituents don’t want her rattling China on trade.
The U.S.-China relationship has shifted under Trump, which is something he may be able to claim victory on when he leaves office.
In the worst-case scenario of an impeachment and indictment by the Senate, Vice President Mike Pence takes over. Pence is the bad cop to Trump’s good cop on China. It only gets worse with the Hoosier in charge instead of the Mogul.
On Tuesday, China’s Ministry of Commerce reported that Vice Premier Liu He had a phone call with Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer to arrange the next round of trade talks during the cease-fire.
Water-cooler chatter has China cutting its tariffs on soybeans and importing between 5 million to 8 million tons.
“I would expect LNG will be next on the purchase list,” says Brendan Ahern, CIO of KraneShares in New York.
Bloomberg reported that China will cut its car import tax from 40% to 15%, though it’s worth noting … this has been promised by the Chinese since May.
Trump is not the only leader facing turmoil. Macron’s approval rating is worse than Trump’s. Brexit is a complete failure and U.K. Prime Minister Theresa May is losing allies on a daily basis. Italy has never recovered from the austerity regime forced upon it by Germany and the European Parliament, and 2019 could be another lousy one for leaders in Rome.
“We worry about European political risks against a weak growth backdrop,” says Turnill.
Schroders of London lists Trump’s Fed, Trump’s trade war, and European political crises as the top three issues impacting global markets next year.
The takeaway: Politicians are a major headwind. If the Fed stands down, then Trump versus Congress and the Special Counsel just adds to the volatility to come.
In all of this: “We prefer stocks over bonds, but our conviction is tempered,” says Turnill. Despite what looks like a rugged year for Trump, the U.S. is still BlackRock’s favorite country to invest in next year.