May 10, 2019. By J.D. Wolfsberg:
We have seen generally upward trending markets thus far year-to-date following the sell-off in the last quarter of 2018, with the S&P 500 (including dividends) up 15.31% so far this year. The Federal Reserve has observed that the US economy is still in its expansion, albeit at a slower pace. Economic data in the US has been positive thus far in 2019, with signs of slower growth from elsewhere in the world, especially Europe. The Fed has indicated that they do not plan on raising rates in 2019, but they remain data-dependent and this could change. The market has discounted this into equity prices reflected in the higher valuations we are seeing thus far year-to-date.
Earnings season has shown that 2019 is off to a good start for US corporations; we have more earnings beats than earnings misses and more sales beats than sales misses. Positive themes include generally strong US demand, cautious corporate optimism, and cost growth from rising commodity prices and tariffs have been able to be passed through to consumers. A few negative themes include automotive weakness, slower economic growth in Europe, and select areas of weak emerging markets demand. Although China’s policies have attempted to stimulate its economy, there are mixed results in regards to its effect, as GM noted that there may be more downside risk then upside risk in the near term. There are notable exceptions among earnings results, such as misses by 3M, Walgreens, and Intel, but for the most part results have been positive. Companies have been hesitant to raise guidance expectations, which most likely stems from uncertainties around trade.
Despite generally positive corporate earnings reports, volatility has returned this week with the United States announcing that they will increase the tariff on $200B worth of Chinese goods from 10% to 25%. The US administration feels as though China is moving too slowly in finalizing a trade deal, with China trade hawks apparently trying to renegotiate terms of the final deal that were previously agreed upon, one of which is the protection of intellectual property. This was one of the cornerstones of a trade deal with China to begin with, so it is unlikely that the United States and its trade advisors will give the Chinese any leniency with this issue specifically. China, observing the US administration’s recent criticisms with the Federal Reserve leaving rates too high, has taken this as a sign that the US Economy is weaker than previously thought. This leads them to believe that the US administration would be willing to make concessions to the original terms of the deal. Although we believe that the underlying fundamentals of the economy and corporate America remain positive, we expect more volatile markets as the United States and China work towards a trade deal.