5-Minute Huddle: Partisan Pants

December 23, 2019

By Justin Pawl, CFA, CAIA

In this week’s edition:

  • Last Week Today.  A quick list of market-moving news.
  • Eco Data Updates. Data from last week shows the U.S. economy is stable, but Europe continues to look for traction.
  • Partisan Pants. Consumers are literally wearing their political views.

This is the final 5-Minute Huddle of 2019, as I break from writing next week. As described below, 2019 was a very good year for financial assets, but on the social and economic fronts results were mixed, as is often the case.  On a global level, collaboration appears to be waning both between and within countries.  A long time ago humans formed groups for protection.  An unintended consequence of people interacting with one another was innovation.  From crude tools developed eons ago, to more recent developments like the Internet and the International Space Station, humans are social beings that with good leadership have unlimited potential.  My hope for the coming decade is that people once again recognize the power of collaboration, and like the endless supply of energy potential of cold fusion, actively seek to harness it’s benefits.

Last Week Today. The House of Representatives formally approved NAFTA 2.0 (aka, USMCA), a day after they voted to impeach President Trump. Normalized trade relations between the U.S., Mexico, and Canada (valued at about $1.2 trillion) may be a bigger boon for the U.S. economy than the China trade deal where the U.S. exports/imports were only $180B/$558 billion in 2018. Regardless, for the time being, investors care more about China. | Boeing, shuttered production of the troubled 737 Max aircraft, pending FAA approval. Boeing’s move is expected to reduce Q1 GDP by about 0.5% but should be temporary assuming Boeing begins shipping planes in Q2 as currently planned.

All three closely followed domestic equity indexes closed the week at record levels as the seasonal Santa Claus Rally added to already impressive year-to-date gains. The shift in investor sentiment vs. a year ago, when equities were in free fall, is remarkable. The reason? The Fed. Ultimately economic fundamentals will determine corporate profitability and the direction of stocks, but the market is susceptible to emotional swings. Last year the Fed raised interest rates 4x and jammed coal in investors’ stockings when they forecast three additional interest rate hikes in 2019. Of course, the Fed’s forecast was mistaken, and, thankfully, the Big Brains determining monetary policy had the humility to reverse their planned course of action and cut rates in 2019. Retreating from their tightening path, the Fed almost assuredly prevented a recession this year and, following 2018, when cash was the best performing asset, risk assets ruled in the final year of the decade. At the risk of being a downer during this jubilant time of the season, it’s worth noting that several measures of investor exuberance are flashing yellow, if not red, indicating the market may have gotten ahead of itself. It’s an excellent time to check your portfolio allocation to ensure that after the great run of 2019, that you know what you own, why you own it, and that your allocation hasn’t drifted outside of your specific goals.

For detailed weekly, MTD, and YTD financial market performance (which is a tidal wave of green numbers), please click on the table below.

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Eco Data Updates. As the decade comes to an end, last week’s data shows the U.S. economy is on reasonably stable ground and our theme of “Good, but not great” growth remains largely intact. However, the Eurozone economy continues to muddle along and negative interest rates don’t appear to be the antidote.

  • The Eurozone manufacturing Purchasing Managers Index (PMI) fell from 46.9 to 45.9 in December (a reading below 50 indicates negative growth). Employment growth also fell to a 5-year low. If there is any good news, it’s that fiscal stimulus in both China (which should bolster European trade) and Europe is projected to buoy growth in the Eurozone; perhaps it will show up in 2020.
  • U.S. Housing is benefiting from lower interest rates as indicated by growing sales, a 20-year high in the NAHB sentiment index and accelerating single home construction.
  • U.S. Manufacturing sector growth appears to have bottomed.
  • U.S. Labor Market is healthy. The chart below shows just how far we’ve come as, except for wages, all labor market categories are above pre-Financial Crisis levels.

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  • U.S. Consumers remain well-positioned to do the heavy lifting in the economy, and last week’s Confidence Data hit a seven-month high.

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  • Household leverage is at its lowest level since the Financial Crisis, wages are growing, and the savings rate (at ≈8%) is above the 7% historic long-run average. The chart below shows debt levels for non-financial companies (NFC), households (HH), and the U.S. Government. Note that following the Financial Crisis, the Government took the torch from consumers as the leader in leverage. The government’s high debt levels will present new challenges for the economy at some point, but not in 2020.

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Partisan Pants. Last month the Wall Street Journal published an interesting article on how American consumer choices are increasingly reflecting political views. For example, consumer research data shows that Democrats are more likely to wear Levi’s jeans while Republicans favor Wrangler brand jeans. Indeed, over the last 15 years, Levi’s popularity amongst Republicans fell while Wrangler’s jumped 13 percentage points amongst Republicans. As the article relates, there’s no easy explanation for the change in consumer preferences. Likely contributory factors include social and political stances companies are taking (e.g., Levi’s support of gun control) as well as geographic shifts of the political parties (rural counties becoming more Republican and urban areas more Democratic).

The article doesn’t mention it, but logically, advertising also plays a role in the increasingly politically partisan consumer choices. As the chart below highlights (and which should be a surprise to precisely no one), over the last 15 years, CNN and Fox News are increasingly favored by specific political parties. The preference shifts amongst voters for several other popular brands are shown in the chart as well. Do you think companies are paying attention to viewer demographics and spending their advertising dollars accordingly?

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Yes, they are. “It doesn’t matter how many people hate your brand as long as enough people love it,” Nike co-founder Phil Knight shared with students at Stanford earlier this year. In a similar vein, the CEO of Unilever PLC (maker of Dove soap and Breyer’s ice cream) is on the record with “I really profoundly believe that seeking this mushy middle ground, that’s not how the world is anymore.” As the political world becomes increasingly polarized, so are companies’ advertising campaigns.

The evolution of consumer preferences reflects a broader trend of the world becoming increasingly divided and narrowly focused. For example, globalization is giving way to international protectionism, and middle-ground politicians are ever scarcer on either side of the aisle both in the U.S. and abroad. While blind conformity is the enemy of innovation, focusing too intently within promotes isolation, intransigence, inefficient allocation of resources, and slower global growth that is bad for everyone. Hopefully, the new decade brings with it, at some point, a renewed spirit of collaboration.

Be well and Happy New Year/Decade,

Justin