Jan 9, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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1 big thing: Chamber of Commerce calls for 2020 action

Photo Illustration: Eniola Odetunde/Axios. Photo: Eric Piermont/Getty Images

The longtime CEO of the U.S. Chamber of Commerce will deliver a speech today urging bipartisan support for issues that Democrats hold dear — like climate change and infrastructure investment, Axios has learned.

Why it matters: The Chamber is the largest business organization in the U.S., and some of CEO Tom Donohue's remarks will be a departure for a group that has, under his leadership, "battled environmental regulations, restrictions on cigarette packaging, workplace anti-discrimination rules and minimum-wage requirements," as WSJ put it.

The big picture: The remarks Donohue plans to deliver — provided first to Axios — will call for the passing of "35 bipartisan bills that can help address climate change through innovation and investment."

  • "Inaction is not an option," Donahue will argue in the speech, which will be broadcast live at 10 a.m. Eastern on the Chamber's website. "So let’s flip the conventional wisdom that nothing gets done in an election year."
  • The remarks will stress bipartisan action, and follow a meeting with "a dozen Democratic and Republican lawmakers to talk about all the things we want to do together in 2020."
  • Donohue also will argue for immigration reform — though the Chamber has long advocated letting more immigrants come to the U.S., to help companies fill jobs.

Between the lines: The speech marks the latest break from the staunch support for Republicans that has been a hallmark of the organization for years after the Chamber got a cold-shoulder from President Trump, as WSJ detailed last year.

The backstory: Last April, the Chamber was dubbed by the Washington Post as "the largest and most powerful corporate lobbying group in Washington."

  • The Post said it had 499 full-time employees and a 95% renewal rate among its members (though it doesn't publish a list, there are said to be 3 million). It also said that members pay $100,000 or more in annual dues — and that the Chamber pulled in $233 million in revenue (with no debt) in 2018.
  • Donohue is set to leave the organization in 2022 after relinquishing his role as president last year. His departure came amid a WSJ investigation that found he spent lavishly on corporate jets provided by the Chamber for both professional and personal trips.

The bottom line: In 2019 the Chamber began working to move away from the GOP and embrace more centrist policies, as the lobbying group clashed with Trump on some positions, most notably immigration, trade and climate change.

2. Catch up quick

The World Bank cut its global growth forecasts for the fourth straight time, reducing expectations by 0.2 percentage points each year for 2019, 2020 and 2021. (World Bank)

Former Uber CEO Travis Kalanick sold his entire stake in the company and a number of other early-stage investors have quietly sold much of their shares despite its weak stock price. (Axios)

U.S. officials knew hours in advance of the strike that Iran was planning an attack on American targets in Iraq. (WashPost)

President Trump said "Iran appears to be standing down" in a speech Tuesday but still said his administration would impose "punishing" new sanctions on the country. (AP)

3. The S&P is significantly overvalued, report finds

The S&P 500 is too rich on a number of levels, according to calculations in a new paper from Ned Davis Research that examines the index's price to earnings, profits and price to sales.

What's happening: Not only is the benchmark stock index's current P/E ratio "well above fair value," S&P companies' prices relative to sales is at a record high, “well in excess of what they were in 2000 or 2007 at those peaks,” Ned Davis, the company's senior investment strategist, says in a note to clients.

Why it matters: Most Wall Street analysts predict that even after earnings declined overall and prices rose 30% in 2019, U.S. equities will rise modestly this year, by around 5%. But Davis warns "the long history of valuations tells me that over long-term periods, prices tend to revert to or below fair values."

  • That would mean earnings would need to increase significantly or equities prices would need to fall.

Further, "[T]he S&P 500 could be overstating earnings due to buybacks and other financial engineering of profits,” Davis says. "S&P 500 earnings have done much better than overall corporate profits for the last five years."

  • "Other measures, like the median price to earnings ratio — which exclude the skewed effects of very profitable and very unprofitable companies — shows the S&P 500 overvalued by nearly 30% versus the typical valuation level seen since 1964."
  • And “P/E ratios are some 80% above the long-term norm,” Davis notes.

The bottom line: "[T]he trend is up and the Fed is friendly," Davis says. But the numbers are the numbers. "This is a real concern."

4. How stocks shake off geopolitical tensions
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Reproduced from LPL Research; Note: The average reflects figures from the original list. Not all market shock events were included in this reproduction; Table: Axios Visuals

U.S. stocks have already recovered their losses from tensions in the Middle East that flared when a U.S. airstrike killed Iranian Gen. Qassem Soleimani last week. The same is largely true for crude oil, which has erased all of its gains since the incident, and a number of other risk assets.

What's happening: "Welcome to the brave new world where it appears that little short of full-fledged world war between nuclear-armed powers would be required to have a durable impact on financial markets. And even then, some begin to wonder," Reuters' Sujata Rao and Dhara Ranasinghe write.

The big picture: The quick turnaround, though, follows a general trend of resilience in financial markets in response to geopolitical crisis events.

  • “Stocks could be volatile for a while, but the impact to stocks from geopolitical events historically has tended to be short-lived,” LPL Financial senior market strategist Ryan Detrick says in a note to clients.
5. The rise of the office home
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Source: IPUMS USA, Ruggles, et al. (2019); and St Louis Fed; Chart: Axios Visuals

Axios' Felix Salmon writes: The U.S. economy is shifting inexorably away from manufacturing and towards services, and with that shift comes a rise in remote work.

By the numbers: St Louis Fed researchers found that more than 3% of American employees primarily worked from home in 2017, up from 0.7% in 1980.

  • That number rises to 4% for workers in sales, and 5% for workers in management, business and finance.
  • In Boulder, Colorado, 9% of full-time employees work primarily from home.
  • At Axios, 12% of full-time employees work remotely from home.

What they're saying: "The technological substrate of collaboration has gotten shockingly good over the last decade," wrote Stripe CTO David Singleton in May, announcing that his company's fifth engineering hub would be "Remote."

  • Some Stripe teams are comprised entirely of remote employees.

The bottom line: America's self-employed have been working from home for decades. Now full-time employees are beginning to discover the attractions of avoiding the dreaded open office.

6. Top executives are pessimistic about 2020
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Source: Deloitte; Note: Survey reflects CFO expectations for year-over-year increases in business spending and hiring; Chart: Axios Visuals

Axios' Courtenay Brown writes: Chief financial officers are bracing for an economic slowdown this year, according to Deloitte's quarterly survey of nearly 150 executives at top North American companies.

Why it matters: Multiple surveys showed plunging optimism among top executives last year, thanks largely to trade war uncertainty. Deloitte's survey is a signal that skittishness continues to curb companies' hiring and spending plans this year, which could further hurt economic growth.

Details: Expectations for a U.S. downturn have jumped since the beginning of 2019, with 97% of CFOs saying that a downturn (either a slowdown or a recession) has already begun or will occur by the end of 2020. Compare that to 88% who said the same about 2020 in the first quarter of last year.

  • 43% of CFOs say consumer spending will be strong in 2020, down from the 54% who said the same for 2019. Just 22% expect strong business spending (vs. 32% a year ago).
  • CFOs said "trade wars" and "uncertainty" are their 2 top company concerns.
Dion Rabouin

Music instructor Terence Fletcher from "Whiplash" is one of the most entertaining and reprehensible characters in modern cinema. If you've never seen "Whiplash," watch it today.