July 26, 2019
Making Cents of the Markets
Be in the Know
Another positive week in the markets, with the S&P500 gaining 1.7% while the TSX gained 0.3%. We had some positivity in regards to trade, as the US and Chinese delegates are set to meet face-to-face beginning on Monday. While the rumours are it will take at least 6 months to get a deal done, this is in line with what we thought will happen. There will be a low chance of any escalation of current tensions, given where we are at in the election cycle for the US. We also had the European Central Bank rate decision on Wednesday, which was taken as dovish (easier monetary policy). Mario Draghi, the ECB president, said it expects its key interest rate to remain “at their present or lower levels” at least through 2020, suggesting a cut is on the horizon. The Federal Reserve is set to make their own decision on the 31st, and this was most likely a precursor to what will come from them, as well.
The week also closed out with the first reading on Q2 GDP, a measure for economic growth in the US. This was expected to slow from the first quarter, where the reading was a robust and unexpected 3.1%, but Q2 still came in at a healthy 2.1% versus expectations of 2.0%. The composition of the growth was the bigger story, with a firm underlying pace on the back of a strong consumer, which grew at about 4%. Business investment and non-residential investment also grew, with the latter rising for the first time in five quarters. The main reason it wasn’t a better overall reading was slower inventory building, which shaved off about 1.5% of the headline number. Given the tariffs in place, it makes sense that businesses built inventory ahead of escalations and thus pared back purchases during Q2. This is the biggest data point ahead of the Fed meeting next week, where we expect the Fed will cut at least 25 basis points as an ‘insurance cut’ against a weakening global backdrop.
The market has been pretty resilient here, holding its highs, despite some geopolitical shocks around the world. It has been a pretty good start to Q2 earnings season as well, and we are already through over half of S&P500 companies reporting. Big banks, industrials, and tech have dominated the early season with health care, energy, consumer discretionary and consumer staples set to wrap the second half (in general). So far, earnings are beating estimates by about 6.2%, with over 71% of companies beating their bottom-line estimates according to Credit Suisse, which means there is strong underlying breadth in these earnings. We mentioned before that despite estimates of an earnings recession for the quarter coming in, we expected companies to outperform and have positive growth, much like they did in the first quarter. Over halfway through and that prediction looks to be correct, with aggregate market value weighted S&P 500 earnings per share set to grow by about 2.1%. If you look at the median company, though, results are much better – expected to grow at about 3.9%.
We still believe the positives outweigh the negatives here, with the Fed support, delay on trade escalation with the 2020 election cycle coming, and technical momentum in our favour. Given the Fed is widely expected to cut rates next week, more attention will be paid to how much more dovish they intend to be. Remember that in the Fed’s history, rarely have they gone with a ‘one and done’ rate move. In the last week we also had some cyclical areas improve, with semiconductors, transports, and banks all improving and providing technical support. With earnings also coming in stronger than expected, the intermediate-term market backdrop remains positive in our view.
Chart of the Week
From our friends at Bespoke Investment Group, a checkup on market breadth. Given that the S&P 500 returned to record highs, it was good to also see the index’s cumulative advance/decline line (a measure of market breadth) also make a new high. While this doesn’t guarantee that the equity market will keep rising, what you don’t want to see is a new high in price as breadth is declining. This breadth action is positive.
Beyond the Markets
It’s that time of year again! The Honda Celebration of Light returns to Vancouver’s English Bay for its 29th year. This year’s competitors are India, Canada, and Croatia – all promising mesmerizing firework displays. The celebration begins Saturday, July 27 at 10:00pm with a musical firework show from India’s Amir Morani Fireworks. Later in the week, Canada will show off its pyrotechnic talent with a show on Wednesday, July 31 followed by Croatia’s performance on Saturday, August 3. Click here to find the best vantage points and prepare yourself for the celebration of the year!
Listen to last week’s Making Cents of the Markets on CKNW, it is Part 1 of our 10 Year Anniversary Special! Listen here. Listen to Part 2 on Wednesday and learn about successfully managing your portfolio during uncertain times and ensuring your nest egg is protected through the next decade.
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!