April 12, 2019
Making Cents of the Markets
Be in the Know
Markets ended the week green overall, after mixed early week trading sessions were punctuated by a positive Friday. Recent noteworthy events included more trade noise, another good report on the labour market, Brexit, and the start of earnings season. On the trade front, it appears that the US now wants to pick a fight with the EU as they announced that they are exploring increasing tariffs on upwards of $11 billion of goods over what they claim are unfair subsidies for European aircraft manufacturer Airbus. The $11 billion number itself is not a concern relative to the size of the two economies but the implications of kicking Europe while they are down could be, especially if tensions continue to rise. Just a reminder that this rhetoric is probably going to increase as the 2020 election year comes closer. Thankfully, the labour market in the US continues to show resilience with US jobless claims hitting a near 50-year low on Thursday, beating expectations. Given that the US economy is predominately driven by consumer spending, solid shopping could lead to better than expected GDP growth in 2019. As expected, Brexit has been kicked further down the road. The EU and UK Prime Minister May have agreed to push the leave date to October 31 which means that Halloween could be scarier than normal this year…
The biggest market mover took place on Friday with the unofficial start of earnings season. JP Morgan and Wells Fargo both beat on the bottom line kicking off a good start. It was previously reported that consensus estimates for earnings were going to be negative for the quarter, but those estimates do not take into consideration the probability of surprise upside earnings beats. A good overview by Credit Suisse noted that the current expectations have overall earnings-per-share (EPS) shrinking by 2.4%, but when you apply a typical pace of earnings beats (like the ones we had from JP Morgan and Wells Fargo today), it actually flips to 2.5% EPS growth! That sets the stage for Q1 to potentially be much better than the financial media assume. Full year 2019 earnings are now expected to grow by about 4% and keep in mind that if earnings continue to rise, even slowly, it allows the potential for continued share price appreciation (assuming valuations stay level).
Over the next two weeks, many major companies will be reporting earnings with a long list of big names (Citigroup, Goldman Sachs, Johnson & Johnson, Bank of America, Pepsi, Netflix, Honeywell, IBM…. ) giving us a good picture. We’ll also get more economic data points with industrial production, leading economic indicators, and retail sales for March, along with some housing numbers. Next week’s four trading days will be packed, as markets will be closed in North America for Good Friday.
While there is solid optimism on earnings, it is important to note that stock markets will not likely continue their feverish pace. We are bullish on the economy and the stock market over the next year, but over the short term, we do expect there to be a pause at some point. If valuations permit, we are confidently picking up a handful of quality names during the earnings season but a reminder of some of the potential headwinds that are out there. Slowing growth or weaker economic data, flattening yield curves that could push more negative, a failure on trade, possible slowing earnings growth and politics among others. These are less likely and many of these headwinds have eased up but they not out of the question.
We actually moved one of the former headwinds to a tailwind – namely the Fed no longer hiking interest rates. Other tailwinds to stock markets at these levels are the soft economic landing potential, a formalized trade agreement with the US and China (trade is a wild card, but we maintain that the G20 meeting in June is the most likely date for a deal to be struck between the US and China which could push us to new highs in the stock market – we are only about 1-2% away from now), a stronger than expected earnings season, and a continued pause on interest rate increases. The global macro picture getting better could also help the markets as sentiment is currently tilted to the positive.
Chart of the Week
US Jobless claims hit a near 50-year low on Thursday, declining to 196,000 last week, a strong sign against any impending recessionary worries:
Beyond the Markets
It is the final 3 weeks of the Winter Farmers Market at Hastings Park! The market runs every Sunday until April 28 and features a wide range of organic fruits and vegetables for purchase, handmade pottery, and food trucks. So head down to Hastings Park this Sunday from 10:00am – 2:00pm and take a stroll through the market – you’re sure to find something you like!
Click here to learn more.
Listen to this week’s Making Cents of the Markets on CKNW. We heard from from Raymond James’ in-house legal specialist, Janet Mason, as she discussed planning strategies and legal complexities of blended families. Listen here.
Check out our latest North Shore News article here to learn more about creating a tax-efficient portfolio. We work hard to earn our money – it is just as important to look at ways to preserve it!