Earnings season got off with a bang as several major banks along with Dow components reported results that, for the most part, exceeded expectations.

That lifted the market by almost 1%. As earnings season continues, day-to-day fluctuations are likely to be somewhat random, reflecting what the major companies reporting results do on any specific day.

Overall, it appears that the pace of decelerating growth, so obvious through the summer, is stabilizing both here and abroad. We have often noted that the combination of demographic factors and normalized gains in productivity suggest a steady state growth rate in the United States of about 2% or slightly better. Tariffs provide a bit of a headwind, but that pressure should lessen at least through the election season. The recent rate cuts by the Fed and other monetary accommodations by central banks around the world will be an offset, helping to give economies a bit of a boost. Thus, all together, the crosscurrents should allow growth close to trendline over the next year or so.

With growth somewhat normalized, one turns to valuation measures to decipher the future path for stocks. P/E ratios are slightly high, but lower than average interest rates and inflation expectations argue that higher than normal P/Es are reasonable. Should the market end the year where it is today, 2019 will see gains in equity values of about 20%. That clearly is not a sustainable glide path. But if one looks at 2018 and 2019 together, that annualized rate of gain is much closer to 10%. Going forward, barring major changes in inflation assumptions, therefore it would seem that 2020 can be a fairly average year for stocks, all other factors being considered.

But alas, 2020 isn’t going to be just another typical year. It is an election year, and it is a year that could decide whether President Trump survives his presidency or not. Discussions of impeachment are beyond the scope of my letters that concentrate on the economic world. But I will say that if President Trump survives efforts to remove him from office, which would seem to be the current consensus, the American public will get its vote next November.

Today, I want to look at next November through an economic lens, the only lens that I want to focus on. Let us start with Mr. Trump. In 2016, he laid out a set of promises and for the last almost three years, he has been focused on achieving them. Whatever your opinion of the President might be, few can argue that he tries to fulfill his promises. The corporate tax cut has been done. If reelected, he most likely will try to reduce taxes further. He has gone to economic war with China. Results to date don’t show a lot of progress, but you can be sure that, if reelected, he will reengage China and spend most of the rest of his presidency trying to force the Chinese to change the ways it does business with the West. He also is a fan of low prices and low interest rates. He will continue to beat on the Fed to keep rates low and lower them further. Mr. Trump is not afraid of debt and deficits. Count on more of both. The pain, if any, will only come if rates rise. So far, so good. But some day, debt service costs will come back to haunt us all. Hopefully for Mr. Trump, that might be a problem for a subsequent president. As for low prices, he will continue to press for lower drug and oil prices. To support the latter, he will do whatever he can to facilitate additional oil and gas drilling. As for the former, legislation may be required to, for instance, allow the government to negotiate Medicare-related drug prices.

Put all together, his economic agenda will largely remain the same. Stock prices are near record levels today, and most investors would probably surmise that market conditions would be favorable in a second term. The only major caveat is that the President began his presidency surrounded by a lot of high quality, but often strong minded, people. Most of them are now gone, and most of the replacements are both less intelligent and less likely to challenge Mr. Trump’s tendency to make impulsive decisions. That has to be a risk factor we can’t ignore.

But the uncertainties surrounding a Trump reelection are far less than the uncertainties attached to any of the democratic candidates. Today, Elizabeth Warren and Joe Biden are the front runners. Few of the others have gained much traction. The overall mood of democrats running for election is much more aligned with the progressive movement and, perhaps, further away from the centrist views of most Americans than many voters would like. So far, the key platform agenda is the Medicare for All concept.

Americans care deeply about a few issues. The ones they care most about are the ones directly impacting them. Syria is once again in the headlines, and those who pay attention to the news have their own opinions about how important Mr. Trump’s moves over the last two weeks might prove in the long run. But unless some ISIS escapees create havoc on our shores, most of us will not see our daily lives altered by what is happening today in Syria and Turkey.

The same cannot be said about the way healthcare is provided in this country and how it will be paid for. To those who thought Obamacare was the answer to better healthcare, watching democrats call for a complete do over is a bit head scratching. Our government runs a lot of consumer services. Three highly visible ones are Veterans hospitals, the post office and Amtrak. I think it is safe to say that satisfaction with the levels of service of all three are lukewarm at best and all are money pits for taxpayers. There are obvious reasons why. First, the government has limited resources to spend. Asking for more money annually is difficult, and Congress only reluctantly provides more money. That almost certainly means that all three are inadequately staffed and technologically behind where they should otherwise be. Second, Congress interferes. There are thousands of unnecessary post offices open today. No member of the House wants to see a post office in their district closed. Amtrak still operates lines to nowhere because a few hundred people would be deprived of a nearby station. VA hospitals have long waits.

America is the world’s richest nation and all Americans deserve basic healthcare, even if they can’t afford it. Healthcare costs per capita in the U.S. are the highest in the world. On the other hand, Americans are used to our system and most don’t want to see it changed in a major way. While healthcare outcomes in many developed nations equal or exceed American standards, in many countries the choices available to consumers are limited, wait times can be every bit as long or longer than what is currently experienced in the VA systems and one cannot always choose their own doctor. While there are tens of millions of Americans who are either inadequately covered or not covered at all by healthcare insurance, the vast majority of Americans are covered, and they are comfortable with their coverage.

Would they like to see improvement? Yes. Would they like their out-of-pocket costs reduced? Undoubtedly. But most don’t want to just scrap what they have today and start over. The leading proponents of universal healthcare, moreover, will tell you the associated incremental costs will be in the trillions of dollars over the next decade, but none will tell you how it will be financed. All Americans know that even with the most progressive tax system, the wealthy alone cannot support such a system. If a progressive democrat is going to become our next president, they are not going to be able to dance around the financing issue.

As I started this discussion, I pointed to healthcare and taxes as two, perhaps the two, issues that will decide our next president. Americans want improvement and change. Most deplore the current political atmosphere. Some despise Trump so much they would be willing to support any alternative, no matter the cost. But the majority of Americans remain centrists. They could accept some tax increases if they felt the resultant level of government services would improve and benefit them. But those advocating bold change are going to have a tough time convincing the centrists that their approach will be the better one. That is the challenge for whoever is the nominee.

How the election battle plays out could impact markets as 2020 progresses. As noted, markets are comfortable that Trump would not ruin their economy. Should events suggest that Trump might not survive his first term, that could add volatility to the market. So far, we aren’t close to that moment. Should polls suggest a progressive candidate could win the election, markets will also react even with the understanding that fulfilling campaign pledges is far from a certainty, particularly if republicans control one or both chambers of Congress. Simply said, so far politics has had limited market impact. It has been a headwind for parts of the healthcare industry but not much else. That could change as the election season becomes more active. And it could lead to greater market volatility in the year ahead. Predicting the economy is tough enough. Rarely do politics become so great an economic factor as they could be in 2020. There is little to do today but watch. As time moves forward, however, adjustments may be needed.

Today, tennis star Naomi Osaka turns 22.

James M. Meyer, CFA 610-260-2220

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