Investment Insights: Mr. 3000
This weekly report presents insights from our Global Investment Management team.
The U.S. stock market reached a few more milestones at the end of last week.
For the first time ever, the S&P 500 closed above the 3,000 level and the Dow Jones Industrial Average closed above 27,000 after dovish comments from the Federal Reserve lifted prices higher. Fed Chair Jerome Powell confirmed the central bank’s view that “monetary policy hasn’t been as accommodative as we had thought,” further raising speculation on impending rate cuts.
Fed funds futures are maintaining a 100% probability of a rate cut at the Fed’s July meeting with the most likely scenario being a 25bps cut; though the forecasts also point to a 25% chance of a 50bps reduction.
The abrupt switch to easier monetary policy has reinvigorated financial markets. The S&P 500 has gained a remarkable 21.2% so far in 2019 and, according to MSCI data, global stock markets have returned 18.2%. However, this high-flying act may be short-lived.
Wall Street analysts are expecting a decline in earnings growth during the second quarter reporting season. FactSet’s most recent report shows analyst estimates for earnings growth at -3.0% for Q2 and -0.8% for Q3 2019. It is important to remember that these same analysts expected first quarter earnings growth to be -4.0%, but they actually came in at -0.3%.
This underscores the trend toward overly bearish estimates from analysts, and also the fact that S&P 500 companies have exceeded earnings estimates by 4.8% on average over the last five years. Earnings growth may end up being marginally positive this season despite negative forecasts, but profit headwinds from slowing economic activity and trade tariffs over the past few months add unpredictability to this outlook. Regardless, very low or negative earnings growth may start to drag on the current valuations in stocks.
Trade continues to weigh on investors after U.S. President Donald Trump announced yesterday that he could impose more tariffs on China if he wanted. The trade truce between the U.S. and China still stands after an agreement from both leaders that included: not implementing new tariffs; easing restrictions on Chinese tech company Huawei Technologies; China buying U.S. farm goods; and a continuation of official trade negotiations.
While not many new developments have surfaced, the U.S. may approve licenses for companies to resume sales to Huawei in the coming weeks, according to Commerce Secretary Wilbur Ross. China’s economy may be beginning to feel the pressure from trade tensions. According to its own data, its economy grew 6.2% in the second quarter, its slowest pace since 1992. However, other economic data points seem to neatly beat expectations.
While monetary policy continues to boost financial markets, our team believes key headwinds may put a cap on further gains. The potential for negative earnings growth will likely weigh on stock prices as results continue to trickle in, and geopolitical issues like the U.S.-China trade dispute, Brexit, and others remain unresolved. Bond markets continue to signal doubts about the economy as yields fall further and the curve inversion lingers on. We remain proactive in our asset allocation and are searching for areas to capture profits and further diversify our strategies.
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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
Diversification and asset allocation do not ensure a profit or guarantee against loss.