July 19, 2019
Making Cents of the Markets
Be in the Know:
While lots was happening in the news, the markets were relatively timid this week, with the S&P 500 retreating 1.2% and the TSX basically flat. A couple of updates this week, checking up on US and Canadian consumers. US retail sales came in much better than expected, growing at 0.4% versus 0.1% expected, another indication that the tight labour market and growing wages are showing up as increased discretionary spending. The Canadian consumer, however, shows a different story. Retail sales declined 0.1%, although the details weren’t quite as soft as the headline. Most of the month-over-month drop was due to an unusually large 2.0% drop in food and beverage store sales that will likely reverse, and sales did increase in 7 of 11 subsectors. That being said, it underscores what happens to a Canadian consumer pinched by ever increasing debt levels. Interest rates that are flat to negative in the next year should help, especially if the Bank of Canada decides to follow the Fed (… and the ECB, China, South Korea, Indonesia, India, Malaysia, the Philippines and South Africa to name a few) and becomes more dovish.
Q2 earnings continue to roll in, and the next two weeks will see 283 companies of the S&P 500 report. According to Credit Suisse, 78% of companies are beating on the bottom line earnings, with an aggregate earnings surprise of 4.1%, and 62% of companies have beaten their revenue estimates with an aggregate sales surprise of 0.82%. So far, so good. If you apply a typical beat rate for the remainder of the earnings season as well, earnings per share is on pace for growth of 2.1%, which is much better than the earnings contraction that was forecast just a couple of weeks ago. The bulk of earnings reports will keep us busy through July, but good to keep in mind that the average company is coming in with pretty healthy earnings growth this quarter.
We have seen some consolidation after an almost 10% rally from June 3 to July 12, which is normal and healthy for the stock market. The short term continues to be a little overstretched, but we still think the market can rally from here with central bankers around the world providing stimulus. While the Federal Reserve has not technically moved yet, it is all but assured to cut at least 25 bps on the July 31 meeting, something that the markets will likely see as supportive enough to keep the economic party going. We think they will also telegraph a further cut sometime this year, as rarely does the Fed make a “one and done” move historically. This is one of the major catalysts that keeps us comfortable with our equity allocations. Are the Fed cuts priced into the market already with the rally this year? Possibly, which is why we have risk mitigation strategies in place. Until we get something that changes our fundamental thesis, however, we are positive on markets at these levels and do not look to trade on week to week news.
The intermediate term backdrop does still remain positive, so we will be using any pullbacks as buying opportunities at this time. The positives of the Fed, the trade de-escalation, and the technical breakouts outweigh the negatives. Regarding trade, it is unlikely that President Trump will dig in here for a significant time, or put on extra tariffs, given the negative impact that would have on the economy and stock markets leading into his re-election run. Of course, there is always the risk he will do something no one is expecting, but he is likely aware of the dire effect of torpedoing the economy during his campaign. Rather, we wouldn’t be surprised to see a patchwork deal in place by the end of this year that can be used as campaign fodder.
Chart of the Week:
A quick look at Raymond James’s US recession checklist from the Investment Advisory Strategy Group (IASG). Compared to 2007, 2001, 1990, 1981, and 1980, it is important to note that none of the same signals are showing worry at this moment, while employment remains as an expansionary signal:
Beyond the Markets
Calling all meat lovers… this weekend is the 5th annual Port Moody Ribfest! Stop by Rocky Point Park to check out an array of ribbers, live entertainment for all ages, a 50/50 draw and much more. BBQ vendors will also be serving beef ribs, chicken, corn on the cob and there is a vegan truck! Admission is free, so if you’re interested in this family fun event, visit their website here for more information.
Hours of operation:
Friday – open until 9:30pm
Saturday – 11:00am – 9:30pm
Sunday – 11:00am – 9:00pm
If you miss the shenanigans in Port Moody, there’s another chance to indulge at the Langley Ribfest happening on August 16 – 18.
Listen to last week’s Making Cents of the Markets on CKNW. We discussed earnings, sector allocations and how to protect your portfolio in this stage of the market cycle. Listen here.
Next week we are celebrating 10 years of Lori being on CKNW! Listen in on Wednesday at 8:40am to hear Part 1 of our 10 year anniversary special to discuss a guide for retirement, top retirement questions, and leading advice from some of the happiest retirees over the years.
Click here to read our latest North Shore News article to learn more about the questions you should be asking yourself before retirement. The better the input, the more accurate the results and the easier the transition will be!