4 Nov 2019
U.S. Stocks Have Made Little Headway with Mixed Earnings and Economic Data
While volatility has subsided of late, U.S. stocks remain in a wide trading range and have yet to surpass their July highs. Mixed earnings and economic data; persistent skepticism surrounding a U.S.-China trade truce and Brexit; and monetary policy’s perceived impotence have kept equities around the world from breaking out to the upside. U.S. stocks are at relatively strong levels and continue to crawl towards new highs, but myriad non-confirmations have revealed that little progress has been made in the past 21 months. Since January 26, 2018, nearly every major global index has experienced a bear market at some point; and some have failed to come back to their prior highs.
Performance since January 2018 has been quite mixed
With the exception of small caps’ weakness, U.S. stocks overall have managed to stay above their January 2018 highs; yet the current bull market has had some weak underpinnings—not least being extreme bouts of volatility and defensive sectors’ leadership. Sectors that are considered “safe havens” have led equities higher; showing that underlying market behavior is reflecting ongoing economic uncertainty.
An update (or lack thereof) on trade
Trade tensions have cooled since the Chinese delegation’s visit to Washington in early October. Optimism initially soared on the heels of President Trump’s announcement of a “phase one” trade deal; but investors dialed back their exuberance after realizing that the agreement had yet to be put into writing. The increase in tariffs from 25% to 30% on $250 billion in Chinese goods was delayed, but the already-imposed tranches remain in place; and the December 15 round—which directly hits consumer goods—is still set to take effect.
Given U.S. stocks’ rather muted activity since the announcement of the trade truce, it appears that investors have sifted out the reality that very little progress appears to have been made; and have thus maintained a cautious stance. Yet, despite a lack of increasing tensions in the past couple of weeks, reactions to trade developments have been nothing short of intense since the start of the trade war. Trade news has driven larger market swings, with the S&P 500 “traveling” 40 points on trade news days; versus 28 points on non-trade news days.
Absent a comprehensive trade deal—one that encompasses the major structural issues at stake and addresses both sides’ list of desires—we continue to foresee bouts of market volatility that could continue to spread throughout the confidence channels. Business confidence has taken a hit, and an increasing number of companies continue to cite tariffs/trade on earnings calls. Capital spending intentions also remain under pressure, as supply chain disruption and persistent uncertainty have forced C-suites to adopt defensive postures. Additionally, should the December tariffs kick in, we may soon start to see the business malaise wade into the consumer side of the economy, given that the goods targeted for those tariffs are heavily consumer-oriented.
Are earnings estimates to be believed?
Earnings season is well underway and this quarter’s S&P 500 “blended” (reported plus expected) year-over-year growth estimate—as measured by Refinitiv—is -2.3%. Companies managed to post gains in the first half of the year, but slashed expectations set the bar quite low. Notwithstanding this year’s harsher macroeconomic environment, the year-over-year comparisons are automatically difficult due to the tax cuts’ boost to 2018’s earnings. So far, 80% of companies have beaten estimates this quarter, but the rub is that the beat rate tends to come down as more companies post results.
Economic data has been mixed of late, with “soft” and “hard” measures telling different stories. Soft data has been pulled down by an increased souring of sentiment; as surveys like the ISM Manufacturing and Non-Manufacturing Purchasing Managers’ Indexes (PMIs), and The Conference Board’s Leading Economic and Consumer Confidence Indexes fell below expectations in September. Hard data hasn’t caught down, though; as new home sales, building permits, and the unemployment rate beat consensus estimates last month. The uptick in overall economic surprises as measured by the Citi Economic Surprise Index was driven mostly by more lagging indicators. On the other hand, leading business cycle components—which are housed in the Bloomberg Surveys & Business Cycle Indicators Surprise Index—have failed to move into positive territory; thus signaling that we are not yet out of the woods.
Cutting it out
Despite the FOMC’s decision to cut rates twice this year, economic activity has failed to pick up, which has aided the argument that rate cuts are unlikely the full elixir for what ails the broader economy. Separately, some have posited that larger structural issues—falling inflation expectations, aging populations, and muted productivity—have somewhat diminished the effects of monetary policy. As global nominal neutral rates have continued to fall due to aging populations’ rush into bonds for safety, central banks have felt the need to move further towards their lower bound. This has greatly reduced their ability to lift inflation; thus rendering monetary policy less effective with regard to the economy—although still effective in boosting asset prices. This has sparked a question as to whether more fiscal levers need to be pulled to combat future economic slowdowns.
While volatility has receded lately and geopolitical tensions haven’t heated up, little-to-no progress has been made on a comprehensive U.S.-China trade agreement; while the timetables for Brexit continue to shift. Although U.S. stocks are trading near their all-time highs, investor hesitation has persisted due to mixed economic data, the questionable effects of monetary policy and trade uncertainty. We continue to recommend that investors use volatility to rebalance and stay near their strategic asset allocations; maintaining our neutral stance on U.S. equities (with a bias toward large caps at the expense of small caps), and our neutral stance on both developed international and emerging market equities.
Investment involves risk. Past performance is no indication of future results, and values fluctuate. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Diversification and rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.
Past performance is no guarantee of future results. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
The S&P 500 Composite Index is a market capitalization-weighted index of 500 of the most widely-held U.S. companies in the industrial, transportation, utility, and financial sectors.
The Institute for Supply Management (ISM) Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.
The Institute for Supply Management (ISM) Non-manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms by the Institute of Supply Management. The ISM Non-manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.
The Consumer Confidence Index is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.
Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc, and the source of comments provided here.
About the author:
Liz Ann Sonder, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.
Jeffrey Kleintop, Senior Vice President and Chief Global Investment Strategist
Kevin Gordon, Senior Specialist