Market Strategy 7/22/2019
Let’s Make a Deal
Key Takeaways
- In the week ahead investors will weigh second-quarter results from nearly a quarter of the S&P 500 companies.
- Trade, budget and monetary policy debates and an uptick in tensions in the Middle East persist as overhanging issues for market performance.
- Positive economic data in our view continues to outweigh the occasional negative indicator.
- Notwithstanding last week’s global equity market give back, year to date performance continues to range from robust to adequate.
Stocks shaved some recent gains last week on a number of concerns including: progress or lack thereof on the trade/tariff war with China; a time clock ticking for a US budget/debt ceiling resolution; the Federal Reserve’s upcoming interest rate decision due July 31, and increased tensions in the Middle East tied to Iran and the flow of oil through the Strait of Hormuz.
The Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small caps) and the NASDAQ Composite (over 40% weighted in tech or tech-related stocks) respectively fell 0.65%, 1.23%, 1.4% and 1.18% in the week ended last Friday.
International markets relatively outperformed in the same period with the MSCI Developed Markets, the MSCI Frontier Markets and the MSCI MXWD (Developed and Emerging markets) respectively shedding 0.13%, 0.25% and 0.65%.
MSCI Emerging markets in contrast advanced for the week posting a gain of 0.63% as fund flows favored the asset class in the same period.
Keeping things in context equity market year-to-date performance around the world (see page 5 of this report for details) continues to broadly range from robust to more than adequate considering the unresolved issues tied to trade, a multitude of political and geopolitical issues, Q2 earnings season stateside along with a current spate of global slowing for economies and markets to digest and ponder.
Expectations for the Federal Reserve to cut rates by 50 basis points on July 31 appeared to fade last week as “Fed speak” and even “Fed chatter” seemed increasingly to signal that the central bank will compromise with the market’s expectations for a rate cut and deliver a 25 bps cut at the end of the month.
On the economic front positive economic data remains persistent, often offsetting other disappointing results. Last week retail sales for June came in stronger (about double) than had been earlier projected in a widely followed survey of economists. (See page 5 of this report for details and an illustrative chart).
Even as manufacturing has felt the negative effects of the trade/tariff war (particularly on businesses exposed to trade with China) the largest segment of the US economy (comprised of services) continues to show strength and sustainability.
Not Everything’s Coming Up Roses
Last week’s release of the Conference Board’s Leading Index, which aggregates data from ten economic indicators, showed a decline in June—its first since last December. Declines in building permits, new orders (in the ISM data) and an uptick in jobless claims were the largest contributors to the decline. (See page 3 of this report for details and an illustrative chart).
However, keeping things (data points, earnings results and even political news) in context of what’s happening around the markets calls to mind that there never is an “all clear” signal sounded over the markets.
The juxtaposition of the positive retail sales surprise last week (along with the US non-farm payrolls released earlier this month that showed a robust 224,000 jobs gain in June), stands in contrast to a decline in the Conference Board’s Leading Index, suggesting to us that for now at least there are enough positives on the economic landscape to point to the sustainability of the current economic expansion and a potential for further gains to be posted by stocks before the end of the year.
Q4 Earnings Season Heats Up
With earnings season gathering momentum (even with some positive surprises among the big banks last week), it’s still too early to tell how the season will turn out. So far with just 77 member companies of the S&P500 having thus far reported earnings are up 2.14% on the back of 2.6% revenue growth. We’ll take the modest gains gladly for now. With consensus analysis having slashed projections for the quarter before the start of the earnings season there’ll likely be a decent chance for enough positive surprises over the course of the next few weeks to see earnings growth stay positive over the season. More than a quarter of the companiesin the S&P 500 are scheduled to report this week so investors will have plenty to focus on.
For now it’s “Let’s Make a Deal” on a number of fronts including: trade, the US budget/debt ceiling debate (and looming deadline) and the Fed’s decision at month’s end.
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