It is worth noting that according to Factset data, US corporations which have 50% or more of their revenue derived from foreign sources have considerably under performed domestically oriented corporations on revenue and earnings.
Short Term Headwinds Emerge But The Long Term Outlook Is Intact
Long Term Investors Maintain Allocations To Quality Stocks
Longer term data remains bullish as consumer sentiment is at a 15 year high, wage growth is at cyclical highs, the unemployment rate is at a 50 year low and estimate for GDP growth is some 2.6% for this quarter and 2.4% for the calendar year.
At the ECB forum in Sintra, President Draghi hinted at measures to combat soft growth and falling market expectations of inflation numbers. There could be a further reduction in interest rates, the extension of forward guidance but more importantly the restart of the quantitative easing program.
Trade Talks and Central Banks will Support Equities
As the rate of growth of both the US and Chinese economies is slowing, President Trump and Premier Xi used the G20 meeting to reestablish trade talks by making concessions to each other. Analysts now fear that the White House might turn its attention to the EU which is setting up a payment system to counter US sanctions on Iran as it restarts its uranium enrichment program.
The hard data tallies with soft data like business confidence and surveys which point to a weak Q2 GDP. Interestingly, investors will welcome this weakness which opens the doors to central bank easing.
The S&P500 index broke new records and closed on the 3,000 level but most European indices ended lower after France’s approval of a 3% digital tax on revenues generated within its territory by foreign technology companies drew the ire of the US administration.
Economic Data Points To Continued But Slower Growth
According to Thomson Reuters, earnings for this quarter are forecast to increase by 1% year over year and revenue by 3.4%; if this materializes, it would be a significant achievement considering it would still be an improvement on the stellar results of last year.
Investment sentiment was buoyed by the possible restart of trade talks between the US and China and a better than expected GDP annualized growth of 2.1% for the quarter. Jobless claims figures also fell sharply and durable goods orders when stripped of transportation (affected by Boeing) rose more than analysts’ estimates.
After reaching all-time highs of 3,027 a week before, the S&P500 retraced to close last week near its 50 day moving average of 2,930. As in May, the catalyst was a Trump tweet announcing new tariffs on imports from China.
A Spike In Volatility Helps Investors Buy On The Dip
Last week, the S&P500 VIX index a measure of volatility, spiked to its highest level this year. The energy sector was the most affected after a surprise rise in US inventories and yields on the 10 year treasuries fell to their lowest level since 2017.
Most major indices ended lower for the week on trade tensions, growth worries and tighter financial conditions. However three sectors within the S&P500 advanced by 1% or more led by the consumer staples segment which benefitted from solid earnings from Walmart which drove the share price 8% higher.
Short Term Equity Price Gains Depend On Multiple Expansion
Companies within the S&P500 have reported financial results for quarter 2 2019 and the growth compared to last year has been encouraging in spite of the stellar performances of 2018. Sales has grown by 5%, earnings by over 3% and margins rebounded to 12% even if they remain below the 12.6% peak of quarter 3 of 2018.
Risk Assets Benefit From De-escalation Of Trade Tensions
An increase by 0.6% in retail spending was the fastest pace in three months but a fall in consumer confidence measured by the University of Michigan showed a drop to levels of 2016; trade tensions may be affecting morale although so far, this is not showing in the hard data as figures on employment, wage growth and an array of measures of demand remain at cyclical highs.
Policy Easing Talks Leads To A Decline In Volatility
Federal Reserve Chair Powell said that since the second part of last year the economies of Germany, China and other European economies had been slowing as a result of trade tensions and this would weigh on the US economy. However he was optimistic that there was no recession on the cards and that the growth rate for this year would remain at around 2% and would be driven by consumer spending.
While the S&P500 rose by 1%, there seems to have been a change in sector leadership as the Russell 2000, an index of small capitalization stocks which has lagged in the year to date closed higher by 5%.
Oil Prices Spike But Broader Indices Remain Range-bound
US equities ended the week modestly higher after a well telegraphed cut of 0.25% in interest rates by the Federal Reserve Bank. Large capitalization stocks outperformed value stocks which were affected by the oil price volatility following attacks on Saudi production facilities.
A More Aggressive ECB Could Spark A Synchronized Global Recovery
In the UK, there seems to be no consensus in parliament on the Brexit agreement secured by Prime Minister Johnson last Friday. It is therefore likely that we are moving towards an extension of the October 31st deadline.
76% Of S&P Companies Report Better Q3 Earnings Than Was Estimated
Factset data shows that three out of four companies have reported better earnings than was estimated by analysts. So far 71% of companies within the S&P500 have reported and the current forward P/E ratio of 17.2 is higher than the five year average of 16.6.
US Growth Stocks Continue To Outperform Their Value Counterparts
FED Chairman Powell’s appearance before the House budget committee revealed that further interest rates cut could be on pause for now as there were no signs that the slowdown in manufacturing was spilling over to the services sector.
There was better news on the manufacturing front in Europe as preliminary estimates of the IHS Markit Manufacturing PMIs showed sequential improvement in Germany even if it remained below the 50 level indicative of a contraction.
At it's core "... sovereign ratings are mostly influenced by per capita income, government income, real exchange rate changes, inflation rate and default history." There is a further emphasis on the importance of corruption..
The US And China Are Driving Global Growth
Within the S&P500 it was noticeable that the Utilities sector led gainers and the small cap Russell 2000 gained nearly 2% and is just under its August 2018 highs. The energy sector was the only one which ended in negative territory with a loss of 1%.