Market Behavior and "Probable Cause"

The too-frequent bouts of market volatility are certainly painful and, in some instances, have been brought on by bad corporate and key individual behavior. I doubt that volatility will ever be eliminated from the marketplace, but the bad behavior that’s driving the extreme market moves of late should be identified and punished severely. Our capital markets that have financed the most powerful economy in the world are worth protecting and maintaining for the generations to follow.
 

Reuters revealed last week that Johnson & Johnson had concealed for decades that their baby powder contained traces of asbestos. Asbestos, classified as a human carcinogen, is known as a leading cause of inflammation and lung disease. This is as bad as the tobacco industry fiasco. At least most of the tobacco victims could read. So what should the punishment be here?
I’m very biased here as “wannabe” grandfather. I think severe prison terms for the past Chairmen of J&J, who served with the complete knowledge of the non-disclosure on asbestos for the last three decades, would be a good place to start. A severe economic fine to be fully distributed to all those impacted should have a positive influence on appropriate corporate governance.

 

It is also being suggested that the abhorrent individual behavior of some of our most senior political leaders has and currently is testing investors’ confidence in our leadership and economy.
 

From an investment standpoint, the U.S. business environment is still very good. The torrid pace of growth and stock market performance that has been ushered in the Trump tax cuts will continue to support GDP growth but at a 2% rate rather than 3%. The trade story with China needs to be rewritten everyday. What appears to have been agreed upon by President Trump and China’s President Xi on trade and tariffs, after a coordinated session of trade talks, could be damaged or vanish in the aftermath of a poorly written Tweet.


Yet among this batch of negative news, there are some positive trends that are quite encouraging. All the research I read suggests that the likelihood of a U.S. recession is quite low. Despite an anticipated slowdown in earnings growth for 2019, it is still expected to achieve 9% for the year. Add that to the fact that the recent market downdrafts have brought the prices down on quite a list of companies well-worth owning. The remaining expected fed rate hikes should also push bond yields higher that will be adding cash flow to all fixed income positions.
 

The governments of some of our best trading partners are introducing measures to stimulate their respective economies. China is contemplating tax cuts in the 1% of GDP range, Canada’s Trudeau has introduced 14 billion in corporate tax breaks and France’s Macron is working on a tax cut package for his middle class. I think all of this suggests that the governing class is engaged and doing something to bolster growth

 

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.