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Tariffs Be Damned, Stocks Radiate Confidence. On Trade Wars, Mid-Term Elections, Tax Cuts, Tattoos & Weed...7 Things to Know

This Week’s…. 7 Things to Know About the Markets & the Economy (On the Economy, Tariffs, Mid-Terms, Tax Cuts, Tattoos & Weed, more…)

1. Markets: “Tariffs Be Damned proclaimed the Wall Street Journal at week’s end as the stock market radiated confidence.There was a boat load of good economic news from lower-than-expected inflation to sky-high business and consumer confidence numbers that drove shares higher (See “The Economy: As Good As It Gets?!” below). For the week, the Dow Jones Industrial Average rose about 1%, or 238 points, to 26,154, its highest close since Feb. 1. The S&P 500 also gained about 1%, or 33, to 2904.98, its second-highest close. The Nasdaq Composite tacked on 107.50, to 8010.04. Not even a ratcheting up of tough tariff talk Friday on the part of the U.S. could dampen investor enthusiasm for long.

2.Trade Battle Rhetoric Won’t Go Away: With President Trump already facing the prospect of a Republican loss in Congress in the midterm elections (see below), there may be little political capital garnered from softening his muscular stance on China. In a tweet Thursday, he said that his officials “are under no pressure to make a deal,” a move seen as undercutting Treasury Secretary Steven Mnuchin who issued the invitation to Beijing. Chinese state media warned the nation shouldn’t expect a quick resolution as Trump has not changed his thinking.  China is considering declining the Trump administration’s offer of trade talks later this month. Elsewhere, negotiations between the U.S. and the European Union appear to be going well with the administration seeking to fast-track Congressional approval for any trade deal.

3.Economic Numbers This Week: As Good As it Gets?!   This week there was a virtual hit parade of good economic data: According to the Conference Board Consumer Confidence survey, Americans haven't felt this optimistic about their income outlook since 2001. The preliminary September University of Michigan Consumer sentiment index also rose to 100.8 from 96.2 in August, well above the 96.6 consensus and the second-highest level since 2004. Meanwhile, the Index of Small Business Optimism from the National Federation of Independent Business was 108.8 in August, the best reading ever. Only August’s retail sales were below consensus, but even there July’s numbers were revised up. August's employment growth of 201,000 was strong.  Better yet, wage growth rose 2.9% Y-o-Y, its fastest pace since mid-2009, and the broadest measure of unemployment hit 7.4%, its lowest level since 4/2001. U.S. industrial production rose 0.4%, above the consensus of 0.3%; consumer prices rose 0.2%, below expectations of 0.3%; and the producer-price index also came in lower than anticipated. These inflation numbers were soft enough to give some investors hope that a second Federal Reserve interest rate hike in December is less likely. Party on Wayne.

4. Handicapping the Mid-Term Elections:House Goes to Democrats, Senate Stays Republican. Republican control of the Senate is razor-thin. There are currently 51 Republicans and 47 Democrats in the Senate, with 2 independents. Of the 35 seats up for election, 26 are held by Democrats. The large number of seats that Democrats are defending, including those in states won by President Trump, make it more challenging for Democrats to gain even the two seats necessary to retake the Senate. The House Flips: It likely goes to the Dems: In late August, the House of Representatives consisted of 235 Republicans, 193 Democrats, and 7 vacant seats. Midterms are typically about the party in power. The president’s party has lost House seats in 35 of the past 38 midterm elections. Historically, the size of the loss has been directly related to the president’s job-approval rating. President Trump’s approval rating recently stood at 43%, below President Obama’s 45% approval rating in 2010 (when the Democrats lost 63 seats in the midterms). Turnout will be a key factor in determining how the midterm races are finally decided. The primary season has shown increased enthusiasm among all voters, but especially among Democrats. Caveat: Does a strong economy help to buck the historical trend?

 5. Tax Cut Forever: House Republican lawmakers introduced legislation this week that would make the 2017 tax cuts for individuals permanent as the party moves to highlight their signature legislative achievement ahead of November’s midterm elections. Separately, Republicans and Democrats in Congress said they had reached a deal  on the first of a series of funding packages aimed at averting a shutdown next month. President Donald Trump has backed away from an earlier threat that would have linked a funding deal with the Mexico border wall, agreeing to push the fight beyond the midterm votes.

6. Rising Interest US Rates: Fed, ECB Outlook: The futures markets shows the highest chance yet of two more hikes from the U.S. central bank this year, with the first seen as a near certainty at the Federal Reserve meeting later this month. In Europe, traders are betting no move until the end of 2019,  later than economists’ projections. Officials familiar with the ECB’s latest projections say forecasts for euro-area growth will be tweaked lower as trade tensions damp global demand.

7. Tattoos in a Bull Market, Cannabis in a Bear Market:The Bull Case for Tats: Among persons over 69, 10% have a tattoo; 13% of those 51-69 have body art. For those 36-50, 36% have a tat and for persons 18 to 35 it's 47%. Moreover, the percentage of persons with two or more tattoos rises from 2% for those over 69 to 37% for those 18 to 35. No wonder this industry is growing 7.7%/year and generated $1.6 billion in 2017. The Bear Case for Weed: When legal weed stores first opened in WA in 7/14, the average price/gram was $32.48. By 1/15, it was $21.07, by 1/16, $12.32, and by 9/18 $7.45, and it'll get cheaper. The price initially fell because it became legal; it keeps falling because increasingly big state-of-the-art grow facilities improve efficiencies and lower costs, thereby commoditizing loose-leaf flower. The next phase; product differentiation via edibles and infused products. - Elliot F. Eisenberg, Ph.D

What We’re Reading

  • 25 of the New Words Merriam-Webster Is Adding to the Dictionary in 2018 ( Mental Floss) 
  • Humans having fewer babies is a big economic problem. (Business Week) 
  •  Is This a Mid-1990s Moment for the Economy? Three Reasons for Optimism ( the Upshot) 
  • It’s Not Time to Hit the Ejector Seat on Emerging Markets (Bloomberg Opinion)