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Quarterly Investment Commentary

Argent Quarterly Investment Commentary – June 2018

23 July 2018

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
– Mark Twain

As we listen to an endless parade of commentators opine on the benefits and perils of tariffs, we are reminded of Mark Twain. How is it that there can be so many smart people who seem so certain that they are correct about some of the most complex economic issues of the day? We wish it were that easy. Fortunately, while arguments rage about tactics being used with our trading partners, the U.S. economy keeps on chugging, just completing one of its strongest quarters in the past decade.

At the midpoint of the year, corporate earnings are averaging better than 20 percent year-over-year gains (and they are only partially due to the year-end tax cuts).  We have solid markets for automobiles and real estate, a healthy banking system, a potentially record year for mergers and acquisitions and an unemployment rate at or below 4 percent, the lowest in 18 years. Better yet, nearly all of our business clients report their businesses are doing well, with their biggest issue being how to hire enough well-trained people to staff their needs. With apologies to George Gershwin, “It’s summertime and the living is easy.”

Nonetheless, as comedian Steven Wright says, “If everything seems to be going well, you have obviously missed something.” That something might be located overseas, as there are legitimate concerns about economic growth in the Eurozone. As a result, many believe our cycle of “synchronized global growth” is in jeopardy. In addition, a strong dollar in 2018, relative to other currencies, has helped put a strain on emerging markets, including countries such as Argentina, Brazil and Russia, many of which have already been hurt by weak commodity prices and higher interest rates.

Domestically, we have two primary concerns about the U.S. economy. First, short-term interest rates have jumped, and the differential between short-term and long-term interest rates is very small. A two-year Treasury note at the end of June was paying only 0.4 percent less than a 30-year Treasury. If the Fed carries through on their current guidance by raising interest rates twice more in 2018, and perhaps another three times in 2019, we could easily end up with short-term interest rates being higher than long-term interest rates. That is termed an inverted yield curve, a scenario well known to accurately predict a slowing economy, or even a recession.

The other concern is tariffs. Small trade skirmishes have happened routinely over the years, generally with little impact on the U.S. economy. This time, however, feels different, as the U.S. administration seems to be in “all out” assault mode on trade. Significant retaliation by others leading to higher tariffs both here and abroad could elevate the skirmish to a trade war, and that would likely be much more debilitating to our economy. Indeed, trade wars appear to us to be a losing proposition for all participants – there are no winners. For that reason, we hope the Trump administration is really using its trade rhetoric as a negotiating tactic to provide what they feel will be a more level playing field, particularly with regard to China and its treatment of the proprietary intellectual property of U.S. companies. If so, one would expect the markets to remain volatile during the negotiating process, but perhaps benefit in the end. On the other hand, if Trump really means all that he is currently saying, it is more worrisome. Markets trade primarily on the expectations for future corporate earnings. If the belief is those earnings will take a hit due to trade wars, investors will likely stay on the sidelines, or perhaps even sell stocks. It is not an outcome we expect, but it is certainly a possibility.

To make good returns, the most important virtue of successful investors is patience. It was a year ago when hurricanes devastated Texas, Puerto Rico and the Caribbean, and a year ago when the situation with North Korea seemed on the verge of war. Like most big stories of the day, these quickly faded, something we guess will happen to trade worries a year from now. If so, investors could be looking at a situation where the U.S. still has a very low unemployment rate, a healthy banking system, strong corporate earnings and positive investor sentiment – in short, a promising economic environment.

(c) 2018, Argent Capital Management

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