August 2, 2019
Making Cents of the Markets
Be in the Know
It was a week full of news that largely led markets to the downside this week, with the S&P500 losing -3.1% and the TSX losing -1.6%. We’ll start with Wednesday’s Federal Open Market Committee meeting, where chairman Jay Powell elected to reduce interest rates 0.25%, as expected, for the first rate cut in 11 years. This cut in rates was described as an insurance cut, protecting against global macro weakness and the uncertainty of trade issues. Markets were pretty calm leading up to and during the decision, but the real fireworks happened at the press conference. Mr. Powell used the term “mid-cycle rate adjustment”, rather than a prolonged cycle of easing, which was taken as more restrictive than expected. We do not see this as a negative, as having the Fed providing stimulus to an economy growing at 2+% with low inflation should be seen as a tailwind for stock prices over the longer term.
Speaking of trade, despite low expectations going into this week’s trade talks and scheduling a follow-up meeting for early September, tensions between the US and China increased on the back of a tweet from President Trump. Thursday afternoon he announced additional tariffs on the remaining $300 billion worth of goods imported from China, which caused a reversal of a 300 point gain in the DOW for the day, only to end down over 200 points. Trump is likely bolstered to act now, as China’s economy is struggling, promised agricultural purchases were not coming to fruition, and the US consumer is doing well. We should note that although there were no major breakthroughs, the talks were described as “constructive” and discussions are still set to continue in September. China did respond to Trump’s tariff threat on Friday, saying that they would take countermeasures if there was a follow through in tariffs. Sound familiar?
Worth mentioning is the jobs report that came out on Friday for the US. While it was clearly overshadowed, the report came in strong with nonfarm payrolls rising by 164,000 in July, and the jobless rate holding at 3.7% – near a 50 year low. Overall, the job market is healthy and the data was broadly in line with expectations.
While this week was the steepest pullback of the year, we do think the fundamentals are still pretty strong. There may be a period of consolidation after trade tensions have re-accelerated, but we still have the Fed at our back, a strong consumer, and pretty strong corporate earnings at our back. We think these will outweigh the negatives out there, especially as the two largest economic nations work toward a deal. We do think something will get done eventually – there is too much at stake for President Trump to not put together some sort of deal ahead of the 2020 election, or at least de-escalate current tensions, and too much to lose for China. The new tariffs aren’t in place as of yet, as there is still a month of negotiating to do, and a face-to-face meeting in early September could be successful.
Although there is a long weekend in Canada, US markets will be open Monday so we will be paying attention to some company earnings, which overall have been strong so far. According to Credit Suisse, about 80% of the S&P500’s market cap has reported second quarter, and earnings are beating by about 5.7% with 68% of companies exceeding bottom-line estimates. Another quarter that was expected to have negative growth is now on pace well into the positive. If we apply a typical beat rate for the remainder of the Q2 earnings season, earnings-per-share is on pace to grow 3.8%. No earnings recession in sight for now.
Chart of the Week
Is this the cause of Trump’s tweets or more signs of China slowing? From Raymond James and Associates (USA), agricultural purchases are way down from recent years, and very apparent when you look at the first half 2019 China soybean imports from the US. We’ll be watching to see if these increase in the coming months as a barometer of trade progress:
Beyond the Markets
This Sunday, Vancouver’s Pride Parade returns! This demonstration of love and inclusivity strives to celebrate and bring awareness to the LGBTQAI2S+ community in Vancouver and around the world. Vancouver Pride Society calls it, “a chance to recognize how far we have come and reflect on where we need to go from here.” While the parade is an event in itself, there are also other events going on that celebrate Pride, including the Sunset Beach Festival and the Davie Village Promenade. Click here to learn more.
From the Pinkowski Wealth Management Team, we would like to wish all those a Happy Pride!
Listen to last week’s Making Cents of the Markets on CKNW for Part 2 of our 10 Year Anniversary Special where we discussed protecting your nest egg through the next decade and successfully managing your portfolio during uncertain times. Listen here.
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!