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As we come up to the end of the 2019 rolls to a close, it’s natural to get reflective this time of year about all the stuff that’s happened over the last twelve months. And as I do I realize HOLY CRAP has a lot of stuff happened!
Let’s take a look back, shall we?
The Longest-Ever Government Shutdown
Last Christmas seems forever ago, but let’s not forget that 2019 started off with absolute anarchy in the Federal government. Trump was demanding money to build that wall of his (wasn’t Mexico supposed to pay for it or something?), the newly-Democratic controlled House refused to give it to him, so he decided to play chicken with the Federal government budget what resulted was the longest-ever government shutdown ever, lasting from Dec 22, 2018 to January 25, 2019.
What resulted was thousands of federal workers getting furloughed, or being asked to work without pay. And while nobody was exactly crying into their egg nog over the plight of out-of-work IRS auditors, it also hit the TSA and air traffic controllers pretty hard, which had the effect of shutting down airports across the US right during the holidays. This caused the economy to hemorrhage money to the tune of $3.6 billion dollars, and caused stock markets to turn sharply negative. Remember this?
Good times, good times.
In the end, Trump was forced to cave on his border wall, handing the Democrats and Nancy Pelosi a big win, and then nothing stupid was ever done by the government ever again.
Trade Wars Everywhere!
Just kidding! Trump then went about starting trade wars with pretty much everyone. In 2018 it was Canada and Mexico as he threatened to rip up NAFTA. Then after that it was Europe for some reason (yeah, take that FRANCE, ya jerks). Then this year, the predominant headline was of course the ongoing trade war with China.
Now, the underlying reasons for this particular conflict aren’t actually that unreasonable: Trump is (justifiably) annoyed at China stealing American IP. And China initially seeming to agree followed by them trying to trick US negotiators into signing an agreement in which they removed all their concessions was classic Commie BS (Again, Never Trust Communists). But the year-long uncertainty and escalation of tariffs that seemingly nobody wanted was a constant threat to the global economy, and ironically ended up hurting the very people that put Trump into power the most: American midwestern farmers.
Now, as 2019 draws to a close the American government has announced a tentative deal that would put further tariff increases on hold and cut existing tariffs that had been imposed in half. Curiously, the Chinese haven’t announced this on their end yet, but in the absence of further surprises (or Communist trickery), the US-China trade war may finally be on a path to de-escalation.
Yield Curve Inversion
Hey, remember this? People on this very blog freaked the Hell out about this back in August.
To recap for all the non-nerds out there, the yield curve is a what you get when you chart out the interest rates the bond market was paying for US Treasuries at all the different durations available from 1 year all the way out to 30. Normally, interest rates are lower for shorter duration bonds and higher for longer duration ones, and this is called a normal yield curve. However, on occasion strange things can happen where longer term bonds yields drop so much that it dips below the interest rate for shorter term ones. This is called an Inverted Yield Curve and is commonly seen as a predictor of an upcoming recession.
That “predictor of an upcoming recession” part is of course why everyone freaked out, and on the day it happened, the Dow dropped 800 points. I argued back in August that the Yield Curve Inversion was not, in fact, a predictor of a recession but instead just bond traders reacting to the possibility of an upcoming interest rate cut.
As it turns out, I was right. Since August, stock markets have recovered, and then continued their unstoppable climb upwards.
Like I keep saying, recessions are always coming. The economy is not designed to continue going up forever. It expands, overheats, then contracts in an endless cycle. What nobody can predict, however, is precisely WHEN a recession is going to happen. So stop trying.
Speaking of things that people should stop trying, Brexit has been the big confusing geopolitical train wreck that just keeps going. Never have I seen a government try so hard and so long at “accomplishing” something that everyone admits will hurt their own economy.
To be fair, Brexit has been going on for 3 years now, so it’s not exactly a 2019 thing, but 2019 is when things really came to a head in terms of ridiculousness. At one point, all we could do was watch the insane spectacle of Prime Minister Theresa May refusing to offer a second referendum because “the people had already decided” on Brexit, while simultaneously trying to jam her Withdrawal Bill through the House of Commons again and again because she kept not getting the answer that she wanted. At the same time, opposition MP’s were trying to table amendments to amendments to indicative votes as the UK parliament twisted itself into knots trying to find a way out of its self-created impasse.
And now, finally, after a December election gave the pro-Brexit Tory party a thumping majority, it looks like Brexit is going to go through after all. Pro-EU “Remainers” had over 3 years to figure a way to reverse the result, but inter-party squabbling and an inability to coalesce around a central leader ensured their votes got split 3 ways while the Brexiteers all rallied together. Like it or not, Brexit is happening and the UK people will have to own the results.
You know who I feel bad for in all this? Theresa May. She’s only the second female PM the UK’s ever had after Margaret Thatcher. That’s a pretty big deal! And during that time, all she did was channel all this negotiating energy into one Withdrawal Bill with the EU, which after months of political wrangling got fed directly into a shredder. Her legacy will be forever cemented as the PM that got nothing done. Ouch.
And speaking of legacies (man, I am NAILING my transitions today!), Merry Impeachmas everybody!
Donald Trump, a man obsessed with his own legacy, who envisioned himself as a transformational president on par with George Washington or Abraham Lincoln, will now be forever known as one of the three presidents who got impeached. Again, ouch.
What was remarkable on this one was the fact that financial markets didn’t react at ALL to this news. Financial markets understand that because of Republican control of the Senate, it was highly unlikely that impeachment would result in Trump being removed from office.
The real trial, and Trump’s fate, will not be decided by the Senate but by the American people. The impeachment saga will allow Democrats to argue in next year’s election that not only is Trump corrupt, but the entire Republican party is corrupt and therefore should be booted from power.
And on Trump’s side, the stakes for him are huge. If he wins re-election despite being impeached, it would effectively annul the results of impeachment and render American democracy’s system of checks-and-balances toothless for generations to come. But if he loses, not only would he be booted from power, but as a private citizen he would likely be fighting criminal charges for the rest of his life. Unless, of course, he tries to pardon himself, which would of course spark another constitutional challenge that nobody knows how it would end.
Either way, 2019 was crazy, but hoo boy just wait until the 2020 election gets under way. You ain’t seen nothing yet.
Why We Don’t Trade On the News
And how did the stock markets do during this period?
That’s right. It ignored all of the noise and just zoomed higher. As of the time of this writing, the S&P 500 was up a stunning 28.2% YTD!
And don’t think this was just a US thing. Here’s Canada’s TSX, up a whopping 20.4% YTD.
Even Europe got to participate, with the EAFE going up 18% YTD.
And that’s why while the news is interesting to follow, you never, ever trade on it. Attempting to dance in and out of the market is why while markets inexorably march higher, normal investors tend to miss out. Because they read fear-mongering articles about Brexit or the Yield Curve and they jump out fearing an impending plummet. While someone who had just closed their laptop and went out to smell the roses made money hand over fist this year.
Again, the noise isn’t going to die down next year. If anything, it’s going to be get even worse as the US election machine of 2020 gears up. Fortunately, Christmas is tomorrow, so maybe a pair of noise cancelling headphones under the tree might be in order?
So here’s wishing everyone a Merry Christmas and Happy Holidays. Turn off the news, go spend time with your family, and here’s to NOT trading on the news.
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