For the week ending 1-11-19
In this week’s commentary we say good bye to 2018, a frustrating one for investors as a spike in volatility made it just the second year since 2009 that the S&P 500 index finished in the red. Economists have attributed the market decline in 2018 to three main factors. In no particular order of importance they are:
- The Federal Reserve’s four interest rate hikes during the year.
- The trade war between the U.S. and China.
- An expected slowdown in the growth of corporate profits.
Looking forward to 2019 we think that volatility will linger into the early part of the year but should abate somewhat if the U.S. and China can reach an agreement on trade. Already there are signs that both sides are motivated to reach a deal. Over the past decade, the Chinese government has given private companies and state-owned enterprises (SOEs) wide latitude to borrow as much money as they want in order to build infrastructure and industrial capacity within the country. While easy credit has fueled enormous growth, benefiting both the Chinese and the world economy, China has become overloaded with debt and the government has had to take steps to reduce the availability of credit or risk a financial crisis. The tightening of available credit has been one of the reasons for the slowdown in the Chinese economy but the U.S. tariffs on Chinese exports has been an additional drag on revenues and investment.
On the U.S. side, we’ve seen some signs of the trade war’s negative effects on our own economy, especially in the agricultural and manufacturing sectors. The negative impact of tariffs will only grow the longer the trade war lingers and for that reason we believe that the two sides will reach some sort of deal in the first half of 2019.
In addition to easing trade tensions, Federal Reserve Chairman Jerome Powell said after the Reserve Board’s meeting in December that he was “listening sensitively to the message that the markets are sending”, and was “open to a pause.” in rate hikes in 2019.
That leaves the growth in corporate profits as the last major overhang for the stock market in 2019. The latest estimates from analytics firm, FactSet, is that corporate profits will have grown 10.6% in the fourth quarter of 2018 from the same period a year earlier.
A 10.6% growth rate in corporate profits can be interpreted either negatively or positively, depending on how you want to look at it. 10.6% is pretty good both as an absolute number (If you were told you’d be getting 10.6% raise either on your salary or your Social Security benefit we imagine you’d be pretty happy about it.) and compared to the average annual earnings growth over the past ten years, which is approximately 8%. However, corporate earnings over the past year have been climbing 20% and Wall Street has become used to that pace of earnings growth. Telling investors that the growth rate they’ve become accustomed to will now be cut in half is not likely to put them in a good mood.
The question before us, then, is how much have Wall Street investors already priced-in the lower earnings growth? The market corrected nearly 20% in the fourth quarter of 2018 and seems to have found a bottom – a least for now. So, it may very well be that Wall Street has anticipated the slower pace of corporate profits and will take the lower earnings in stride. As is usually the case, a lot will depend on what corporate officers will say is their outlook going forward when they talk to analysts following the release of their quarterly numbers.
Despite the volatility, economists mostly agree that the underlying fundamentals remain strong and a recession is not likely in the short-to-medium term outlook. Unemployment, consumer spending, capital investment and steady or falling interest rates are all bright spots for the economy and the stock market. Given the positives in the underlying economy, 2019 does not have to be a repeat of 2018.
For the week, the Dow Jones rose 563 points to 23,996 (2.4%); the NASDAQ was up 232 points to 6,971 (3.4%); and the S&P 500 added 64 points to 2,596 (2.5%)
Oil rose $3.50 to $51.50/bbl. Gold was essentially unchanged at $1,290/oz.
The yield on the 10 yr. was also unchanged at 2.7%.
This weekly market commentary is written and produced in house by the investment team at Winch Financial. If you’d like more information about our investment strategies, please call our office at 920-739-8577. We’re always glad to help.
Disclaimer: It is worth noting that the opinions in this commentary are John Hintz’s and may occasionally vary somewhat from the opinions of the Winch Financial investment team as a whole. Client recognizes that any opinions or analysis described in this commentary involve the Advisor’s judgment and good faith and do not constitute investment advice. All recommendations or observations are subject to various market, currency, economic, political and business risks. Client recognizes that no party to this alert has made any guarantee, either oral or written, that Client’s investment objectives will be achieved. Advisor shall not be liable for any action performed or omitted to be performed or for any errors of judgment or mistake, except in the case of Advisor’s gross negligence, willful misconduct, or violation of applicable law. Advisor shall not be responsible for any loss incurred by reason of any act or omission of Client, custodians, broker-dealers, or any other third party. Nothing in this commentary shall constitute a waiver or limitation of any rights that Client may have under applicable state or federal law, including without limitation the state and federal securities laws.