When you get a manufacturing gauge slipping to the lowest level since 2009, you are going to get the freak-out that we saw Tuesday. You are going to start believing that we are importing the recessionary characteristics that we see all over the globe, characteristics like negative interest rates, which are a sure sign of little to no demand for money.
Are things that bad? I remain a non-believer in the recession thesis. But first let's spell it out so you know how I am disagreeing with it.
I think the single biggest prop behind the recession thesis is the president's trade policies. By limiting imports from China, that gigantic economy is faltering and taking the rest of its trading partners with it, especially Europe. That, plus worries about Brexit and a lack of fiscal stimulus out of Germany, are contributing to a worldwide slowdown, one that we are no longer immune from.
It's a decent thesis, one that would make sense, if we were a manufacturing export-driven economy. We aren't. We are a service-driven economy -- two-thirds of our commerce is non-industrial domestic. Much of our industrial base was decimated by the very country that we are now tugging against, China.
Every time I sit down to divine what we still make that is exported I come back to the same thing over and over again: airplanes and autos. It's intriguing to me that the biggest export we make, the Boeing 737 MAX, isn't going past the parking lot. At the same time General Motors (GM) is on strike. To ignore those two variables is to create an air of panic that's unwarranted. The number is exaggerated because of these two extraneous factors, especially Boeing (BA) .
Therefore, I want to keep this manufacturing index in perspective: we are not going back to a 2009 economy, which was the worst since the Great Depression. I don't think our exports can take us down like that. It's too small to do that kind of damage.
At the risk of sounding rational let me give you my thinking of why Tuesday was such a brutal day.
First, the market's up an insane amount right now for the year, 17% for the S&P and 19% for the Nasdaq. We are in the last quarter of 2019, and at a moment when mutual funds typically begin to take profits so that you, if you own mutual fund shares, can do some tax planning.
You pretty much have to say that taking some profits makes a lot of sense just on the adage of "bulls make money, bears make money and hogs get slaughtered." We have been taking relentless profits -- and some losses -- for my charitable trust, all of which are explained to you if you join the Action Alerts PLUS club. The market had gotten severely overbought and we told club members we would be selling heavily, until we got oversold and then we would rethink our stance. Tuesday's the first day in ages we initiated a new position but we are being chary in what we put to work, cognizant that there's fear everywhere, panic-inducing fear that you want to buy, not sell, because no one ever made a dime panicking.
Second, the market is exhausted, exhausted by initial public offerings that are no longer wanted because buyers want earnings, not sales growth, and are sick of money losers, money losers like Peloton (PTON) , which came public at $29 and now sits at $23 and change. This one comes on the heels of the very visible SmileDirectClub (SDC) , Lyft (LYFT) and Uber (UBER) . The brokers came close to jamming WeWork down our throats and you have to hope that there are more companies like Endeavor, the agency company with a ton of EBITDA, that shelved its offering last week rather than risk being pulverized -- Peloton style. To disclose: Endeavor is my agent.
Third, Tuesday we got a rude awakening of what could happen with third-quarter earnings when we saw stocks of the brokerage houses collapse on the news from Charles Schwab Corp. (SCHW) that it will no longer charge customers commissions on a host of products, including stocks, exchange-traded funds and options. Schwab's stock dropped ten percent. The stock of competitors Etrade (ETFC) and TD Ameritrade (AMTD) fell 17% and 25%, respectively. Of course, I could argue that reporting a slightly better-than-expected number, as spice maker McCormick (MKC) gave you, presents you with an instant reward, in this case ten points of gains. I think there will be plenty of stocks that will give you similar gains when we get the October reports.
Fourth, the rancor. Just a few weeks ago House Speaker Nancy Pelosi was talking to me about working with the president to pass the new NAFTA, the United States, Mexico and Canada revised pact that will be incredibly important to so many companies and employees including the autos, the transports and the ag businesses. Then just a few days later she's leading the impeachment effort in the House. Hard to do both at once.
Numbers were going to go up for 2020 if we passed this new trade deal. Now it may not be the case.
Rancor 2? The belief that an impeached president will not be able to get a deal from China and could become such a liability that it could lead to a Democratic sweep, a sweep that would most likely put putative Democratic leader Elizabeth Warren in the White House and give both chambers of Congress to the Democrats.
I do fear Rancor 2, not because what I think will ultimately be the case but because there will be endless bouts of selling before the election every time that the impeachment proceedings go front page or when Elizabeth Warren and Bernie Sanders are neck and neck with the popular assumption that Warren's more electable and Sanders' votes are going to her.
Why aren't I more fearful about the Washington scenario? For one, it's very early, we don't know what will happen. Forgive me, but it's premature to predict a Warren-led sweep. Second, there's always the possibility that the president will get a Chinese trade deal. I think it's slim but if the president thinks things are slipping one will get one.
But, most important, can we just take a breath for a moment and recognize that a Warren presidency isn't the social upheaval that those with stocks fear? I think she will raise taxes on the very rich. I think she will go after companies she believes are too powerful like Teddy Roosevelt did more than 100 years ago. As Mark Zuckerberg indicates, it will "suck" if she does, but his company will be able to argue its case in a court of law and perhaps win. Will she break up tech? I have to tell you that as I see the price-to-earnings ratios collapse for big tech, would it be so bad if, say, Alphabet (GOOGL) were broken up? They may not want it to be, but I am no longer sure I wouldn't want it as the sum-of-the-parts is most certainly worth more than the whole.
Most important, I think Warren will push to make capital gains and dividends be taxed at the same rate as ordinary income given that rich people benefit inordinately from those two streams of income. It's certainly possible that people might try and anticipate that change. Again, though, that does seem like gun-jumping.
No, I am not saying it's time to hit the exits. The opposite. If you have been selling for weeks, as we have been advising, you are looking for dislocations that aren't justified. But if you are living in fear of Elizabeth Warren I am not going to attempt to reassure you that the world won't end; your mind is made up and there's nothing that will happen, including the truth, that will change that.