All Posts Tagged: corporate earnings

U.S. Outlook: September Ending on a Cautionary Note

Scott Anderson
Chief Economist

For investors keeping your eye on the ball will become even more important in the quarter ahead. The formal impeachment inquiry that has begun in the House of Representatives will likely add to the daily market volatility in both the equity and the bond markets.

Trade Disruption

Not only because of how it could shape the 2020 U.S. presidential election outcome, but also what it might mean for the prospects for trade agreements between the U.S. and China, U.S.-Mexico-Canada-Agreement passage, and the Japan trade agreement reached only a few days ago. Trade agreements already reached with the Trump Administration could find a harder time getting passage in Congress. Furthermore, Congress may be less inclined to cooperate with the U.S. Trade Representative and demand more extensive changes in the language of current agreements.

If the Chinese trade delegation believes President Donald Trump is more politically vulnerable, they may hold out for an even better deal down the road. If so, the chances of additional tariffs and continued trade war uncertainty into 2020 will increase.

Complacent Markets 

The stock market initially took the news of impeachment largely in stride. Many analysts on Wall Street quickly dismissed the impact of impeachment on trade negotiations, the economy, and markets. However, I don’t see it quite that way. From my perch, I think the markets are a bit too complacent about the risks that continue to build in the global and U.S. economies. In fact, the hope of a China-U.S. trade deal sometimes seems like the only thing keeping the bulls in charge. One doesn’t have to look too far for signs of complacency. The VIX index, a proxy for future stock market volatility, has plunged from the August highs and yesterday stood just above a downward sloping trend line in place since 2011.

Even after the drop on Friday, the S&P 500 is still up 18% year-to-date. Meanwhile, Factset shows forecasts for a third consecutive quarter of negative earnings growth for S&P 500 companies in the third quarter. Just today, a report said that 82 of 113 S&P 500 companies that have reported earnings have issued negative guidance for the current quarter. The lowered forecasts appear to be driven by information technology, consumer discretionary, and healthcare companies.

Toxic Mix for Markets

In the bond market, high-yield corporate bond spreads have narrowed by 81 basis points from August. They have narrowed by 181 basis points since the end of 2018.  The corporate high–yield credit spread is still near current expansion lows. In other words, fixed income investors are still reaching for yield and happily taking corporate credit risk for very little compensation in terms of yield. This seems to be a very toxic mix of financial market complacency against a deteriorating backdrop of declining earnings and fading global economic growth prospects. Recent data out of Germany and the euro zone point to a possible recession in Germany and continued slower growth in Europe. Industrial confidence in the euro zone just hit the lowest levels since 2013.

Here in the U.S., a disappointing consumer spending report for August has led us to cut our estimate for Q3 real consumer spending growth down to 2.7% from a previous estimate of 3.5%. We now see third-quarter U.S. GDP growth slipping to 1.6% and Q4 GDP at an even slower 1.5%, down from 2.0% in the second quarter. An intensifying global slowdown and the escalating trade war will mean continued pressure on U.S. business investment and exports, with less support from a strong labor market and consumer going forward. It’s easy to become complacent when “buy the dip” seems to always work and stock market valuations hold just below record-high levels.  However, before too long, the gravity of the deteriorating economic environment will bring market valuation back into line with deteriorating fundamentals.

To find out more, check out my U.S. Outlook.

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U.S. Outlook: Retail Sales Cool in August

Scott Anderson
Chief Economist

Pull back the lens on August’s U.S. retail sales data and a clear slowdown comes into focus. July retail sales growth was twice as brisk as August sales.

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Investment Insights: Stocks aren’t a sinking ship

Wade Balliet
Posted by Wade Balliet
Investment Strategy

While we haven’t been crying wolf over recession fears or a market correction, our team continues to view risks as skewing toward the downside for financial markets. We maintain our forecast for a potential economic slowing in the latter part of this year and into 2020, which should mean corresponding movement in the stock markets. Our strategies remain relatively defensive in the current environment, and our recent allocation adjustments should contribute positively to our performance.

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Investment Insights: Reaching the endgame

Wade Balliet
Posted by Wade Balliet
Investment Strategy

“Better than expected” is the expression that keeps coming to mind for investors as the first quarter earnings season continues to beat forecasts.

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Investment Insights: Will earnings take the driver’s seat?

Wade Balliet
Posted by Wade Balliet
Investment Strategy

After an extensive decline in the last quarter of 2018, U.S. stock markets are bouncing back and are nearing record levels.

The S&P 500 is now up over 16% in 2019 after a stellar first three months of the year – the best performing quarter since 2009 – and the index is just 30 points away from its all-time high per Bloomberg.

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