For investors, the fourth quarter of 2018 got off to a rocky start. After setting new highs just the month before, the stock market embarked on a sharp decline and Treasury yields shot higher.
Douglas Coté, chief market strategist for Voya Financial, suggested at the time that anyone unnerved by the turbulence may be missing the bigger picture.
Addressing the SVIA 2018 Fall Forum on October 9, Coté said Americans are a pessimistic lot, susceptible to turning “every little news item into a big thing.”
But that focus on current events, he explained, can mask lots of positives. When he looks at America today, Coté said, he sees a country with access to trade along the East and West coasts, the Gulf of Mexico and the Bering Strait. He sees a vast Middle America that produces so much food the country is able to export much of what it grows, and vast crude oil resources newly accessible via fracking. He sees a U.S. Navy that knows “everything happening in the world’s oceans every millisecond,” and a country that recently rid itself of a bitter nemesis in ISIS.
For an investor, Coté said, that constitutes a “pretty good baseline before we even start talking about economics.” And there, he suggested, the outlook is pretty good, too.
Ten years after the worst recession in our lifetimes—Coté called it a depression—the U.S. economy has been reinvigorated by a pro-business president, Donald Trump. Capital spending by businesses has been on the rise for six consecutive quarters, he added, and corporate profits, helped by a massive cut in the federal corporate income tax rate, are soaring. Unemployment is at its lowest level in 49 years, and exports are at record highs.
While some investment analysts are fretting about trade wars and tariffs at the moment, Coté argued that their negative impact will be minimal compared to the positive impact of the Trump tax cuts and the business deregulation initiatives undertaken by the Trump administration.
The good news isn’t confined to the U.S., either, Coté said, noting that approximately 185 out of the world’s 190 countries had positive economic growth last year. Importantly, that included growth in what he called the “Big Three” drivers of the global economy—the U.S., Europe and China.
The most important metric in all of that, Coté said, is corporate profits, which he likened to the “canary in the coal mine” for the stock market. “If we get negative corporate earnings, that’s bad,” he said. “Up is positive.” And right now, he said, the signals coming from corporate earnings are not good, but “great,” concluded Cote.
Asked by a conference participant whether the surge in corporate profits might just represent a “sugar high” from the Trump tax cuts—one that might soon fade—Coté argued the opposite. He said business behavior is changing. Companies are investing money in plants and equipment, and productivity is improving. He likened the tax cuts to a “gift that keeps on giving.”
He also downplayed the possible negative impact of rising interest rates. The Federal Reserve has raised its target for short-term rates eight times in the last two years, painting it as a healthy reaction to a rising economy. He also argued that the U.S. is doing the right thing in trying to reset its trade relations with China, a market which, however things work out, will remain too big for the U.S. not to engage in.
What worries him most, Coté said, is cyber warfare. “It’s rampant, and the Chinese are best at it,” he said. “We do have to counter it. To me, that’s the biggest risk in the economy.”
