New market thoughts from Raymond James’ Jeff Saut : “McKinleynomics” 06/15/18

Smithers: Sir, bad news from accounting, the economy has hit us pretty hard.
Mr. Burns: Tough times eh? I’ve lived through twelve recessions, eight panics and five years of McKinleynomics. I’ll survive this.
…The Simpsons, Season 5, Episode 10 (1993)
The 25th President of the United States, William McKinley, is largely remembered these days as the third U.S. president to be assassinated while in office and for lending his name to the highest mountain in North America until three years ago when it was officially changed back to Denali. However, his political career around the turn of the 20th century was synonymous with tariffs and protectionism, as he guided the McKinley Tariff Act of 1890 into law as a Congressman a full six years before defeating William Jennings Bryan to become president. During his presidential run, he even stated, “I am a tariff man, standing on a tariff platform,” making his views on the subject quite clear and striking an obvious chord with Americans struggling through a recession. Now, 120 years or so later, the United States might not exactly be going through a full rebirth of “McKinleynomics”, but there obviously continues to be quite a bit of focus on tariffs and global trade negotiations.
The White House is expected to announce today the final list of Chinese goods that will be subject to the long-discussed tariffs, though CNBC has reported that the list has shrunk to 800-900 products from the original 1,300 number published back in April. Still, the move is expected to draw retaliatory measures from China and further escalate the “trade skirmish” that has been monitored closely by global investors. It has also been reported by Reuters that the U.S. is close to completing a second list of tariffs on $100B of Chinese goods that would go through a similar hearing process as this current batch, so we may have to go through this yet again.
The U.S. stock market, though, has remained about as resilient as we could have hoped for throughout the last couple of months of back-and-forth rumors and threats, and despite the “big stall” over the last week in the major averages, the broad market remains quite healthy. In fact, the clear strengthening of stocks under the surface of the market continues to be one of the more underreported stories of the moment. Seventy percent of stocks in the Russell 3000 have gained ground over the last month, and essentially every breadth indicator we follow remains in better-than-average territory. That means opportunities do still exist in the stock market if one is willing to do a little digging and ignore the tariff noise.
I recently chatted with one such portfolio manager about some of those opportunities last week, namely Neil Desai who has run the Putnam Global Technology Fund since 2014. Our conversation was wide-reaching and touched on everything from the global landscape for technology companies (Neil recently returned from a visit to China) to the much better general stock-picking environment that has developed over the last couple of years. In addition to his fund being right in the intersection of some of our often-discussed, long-term themes – active management, technology, thinking globally, a focus on growth stocks, etc., I really like Neil’s overall approach that has led to a five-star rating from Morningstar and one of the 20 highest three-year Sharpe ratios among funds according to Financial Planning Magazine. He truly is looking globally for attractive situations and focused more on absolute returns than on shadowing the benchmark (e.g., the fund has 22% of its holdings in emerging markets compared to practically none for the MSCI World Information Technology Index). Our conversation also helped confirm my continued fondness for the global technology sector even amongst the trade talks, and it still seems likely that if this secular bull market powers on like we think it will, technology is probably going to help lead the way.
This morning, everyone appears to be focused on the trade news, with the futures down marginally. President Trump has reportedly approved the list of goods subject to the tariffs, but it remains unclear when exactly they will go into effect. If we do get an official announcement sometime today, that could lead to some volatility, but without a major surprise, it seems to us the market has largely been expecting this news.

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