High levels of uncertainty in international trade, geopolitical outlook, and domestic politics in the USA are likely to have a domino effect on business and consumer confidence.
Business is likely to postpone or curtail new investment decisions. This is already evident in a down-turn in new capital formation, along with GDP growth, in the first half of the calendar year.
A similar picture is emerging in construction spending.
CEO confidence levels are way down.
A slow-down in business investment in turn impacts on employment, causing a decline in payroll growth and average weekly hours worked.
Which in turn impacts on consumer sentiment as employees’ anticipation of future earnings declines.
The feedback loop will be completed if consumption falls. Retail sales dipped sharply in late 2018 but are keeping their head above water.
And purchases of durables, like light motor vehicles, have leveled off but there is no significant decline so far.
New housing starts and building permits even kicked up in August in response to lower interest rates.
Consumers have, so far, continued spending but a down-turn in the stock market would weigh heavily on sentiment and consumption.
The S&P 500 broke its rising trendline, indicating a correction. Bearish divergence on Twiggs Money Flow warns of secondary selling pressure and a test of support at 2800. Breach of support is by no means certain but would offer a target of 2400.
We have reduced our equity exposure for International Growth to 34% of portfolio value because of our bearish outlook for the global economy.
