Nov 7, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Note: The overwhelming majority of today's newsletter was written before the trade deal news broke. So, you know, keep that in mind.

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Situational awareness:

  • A top Chinese official announced that both sides in the U.S.-China trade dispute have agreed to roll back tariffs as they work toward a deal. (CNBC)
  • Europe needs to come up with emergency plans, the IMF warned, since monetary policy has seemingly run out of bullets and Germany again declined to pass fiscal stimulus measures. (Bloomberg)
  • Alphabet's board of directors has hired a law firm to assist in an investigation of sexual misconduct by executives. (CNBC)

(Today's Smart Brevity count: 1,122 words, ~ 4 minutes.)

1 big thing: The bad news about historically low unemployment

Illustration: Aïda Amer/Axios

Wednesday's productivity report is the latest sign that historically low U.S. unemployment may be indicating a sick, rather than a healthy economy.

What's happening: As uncertainty has increased over the U.S-China trade war and other geopolitical events, companies that have the capacity to invest in new equipment, technology or factories are holding off and hiring workers to pick up extra slack instead.

Why that's bad: The increase in hiring is less about expansion or optimism than the fact that workers are a cheaper investment, and one that is easier to reverse should the economy go south.

  • "If the economy improves, that’s great, you’ve got more workers; if we do have a recession, then you have the flexibility of deciding whether you need to lay off some workers," Bernard Baumohl, chief global economist at The Economic Outlook Group, tells Axios.
  • "At that point, you’re treating workers as inventory."

By the numbers: This story of hiring as uncertainty insurance is being borne out in the data, experts say.

  • U.S. real output per hour, seen as the standard measure of worker productivity, fell by 0.3% in the third quarter from the second, marking its first quarterly decline in almost four years.
  • Similarly, the latest U.S. GDP report showed business investment had declined for the second quarter in a row, falling by 3% from the quarter before.

Why it matters: Productivity is the secret sauce to economic growth, and the U.S. has had underwhelming productivity growth for the last 15 years — a full 1% below the pace of annual growth in the 15 years prior.

  • Further declines could weigh seriously on already slowing GDP.

Threat level: A basic way to measure productivity is, "Do you give workers more tools?" David Kelly, chief global strategist at JPMorgan Asset Management, tells Axios. "We're actually increasing the number of workers and decreasing the number of tools in the last two quarters. That doesn't bode well."

Yes, but: Experts also remain bullish on a positive outcome to the trade war and other uncertainties clouding the economic outlook.

  • Further, the rising wages of Americans — and the increasing trouble businesses are having finding qualified people to hire — may force corporate America's hand.

The last word: "If freedom is just another word for having nothing left to lose, then productivity is just another word for having no one left to hire," Kelly says.

2. Equity and M&A deals plummet in tough Q3
Expand chart
Adapted from S&P Global; Chart: Axios Visuals

U.S. and global dealmaking slowed significantly in the third quarter, with equity and M&A announcements "plummeting" year over year and quarter over quarter, according to the latest data from S&P Global Market Intelligence.

By the numbers:

  • The global total value raised from equity deals fell 37.1% quarter over quarter and 29.4% year over year to $91.85 billion.
  • In the U.S., deal value fell by 35% from the second quarter and 11% from Q3 2018.
  • The total sum of $10 billion-plus global M&A transactions fell 78.8% and the sum of $1 billion-plus global IPOs fell 62.5%.

Be smart: Q3's weakness happened in the context of heightened global uncertainty and a number of geopolitical events that shook confidence, including the Saudi Arabia oil field strike, Brexit negotiations and a surprise election result in Argentina, S&P analysts note in the report.

The bottom line: "The trade war has been taking a toll on economic growth. Countries such as Germany with the greatest exposure to manufacturing and trade have seen the most weakness. Consumers have remained resilient, which bodes well for consumption-driven economies such as the U.S., but the tariffs keep coming."

3. Americans ready to spend on holiday shopping, but expect discounts

Americans plan to increase their holiday spending, with the average rising to about $675 on gifts this holiday season, according to a survey provided first to Axios by The Conference Board.

  • That is an increase from last year's estimate of $627.

Yes, but: Consumers say they are expecting steep discounts, with more than a third reporting they expect — at a minimum — to buy half of their gifts on sale.

  • "Consumers will be discerning when spending," The Conference Board says in a release accompanying the data.
  • "Most will expect bargains, comparison shop, and wait up to the last minute for steep discounts."

The intrigue: Consumers continue to move online for holiday purchases. The Conference's Board survey, conducted by data provider Nielsen, found that 42% of respondents expect to do at least half of their holiday shopping online. That's up from just under 37% in 2017.

4. Millennials' poor health may start to weigh on the economy

Axios' Caitlin Owens writes: Millennials' health problems are on the rise, with future adverse consequences to both their own finances as well as the U.S. economy, according to a new report by the Blue Cross Blue Shield Association.

What they found: As millennials age, their health is declining faster than the previous generation's, and they're increasingly suffering from conditions like hypertension, high cholesterol, depression and hyperactivity.

  • If the pattern doesn't change, millennials' mortality rate could climb by more than 40% compared to Gen Xers when they were the same age.
  • Under the worst-case scenario, their health care costs will be up to 33% higher than Gen Xers' at the same age.
  • Poor health could cost millennials more than $4,500 in annual per capita income.

The big picture: The biggest changes are in millennials' behavioral health. In 2017, accidental deaths — including overdoses — and suicides caused 60% of deaths among 25-29-year-olds, according to the CDC.

  • "Millennial health patterns can cause declining millennial economic outcomes that in turn can cause further declines in millennial health. This represents a potentially vicious cycle resulting in even higher prevalence of depression and other behavioral health conditions over time," the report concludes.

Caitlin's thought bubble: Our health spending is already on an unsustainable path. This absolutely does not help.

Go deeper: Today's health problems are tomorrow's health crises

5. Investors are getting defensive

Equity investors are making a sustained move to value stocks and more defensive sectors of the market, data from Bank of America Merrill Lynch show.

  • Equity analysts say BAML clients are increasingly moving into health care and utilities (which saw nearly record inflows from both institutional managers and hedge funds) as well as large-cap stocks and domestically oriented sectors.

Why you'll hear about this again: In its last fund manager survey, released in mid-October, BAML analysts noted that "investors rotated into defensive equities like healthcare and consumer staples and out of cyclicals like materials and banks."

  • In a note to clients Tuesday, they said: "Value ETFs continued to see inflows for the past eight weeks, as we see a case for sustained rotation to Value once macro data starts bottoming out."

Of note: Investors took profits on equities after the S&P 500 and Nasdaq touched all-time highs last week, with "ETF inflows dwarfed by single stock outflows," that led to net selling for equities after six straight weeks of net buying.

Dion Rabouin

Editor's note: In the third item of yesterday's Markets I incorrectly referenced and linked to the S&P U.S. Spinoff Index instead of the S&P U.S. IPO & Spinoff Index. The IPO & Spinoff index has trailed the S&P 500 by 8% over the last six months (not nearly 12%).

  • Shout-out to reader Henry for catching and keeping me honest.