Weeks 29 & 30 Sitrep

The U.S. stock market paused to catch its breath last week after achieving new all-time highs on Monday, July 15th. The S&P 500 closed last Monday at 3017 but finished the week at 2977, down by 1.2%. As we have discussed in multiple recent SITREP’s, the markets are considering two major pieces of news during the month of July. First, the market is digesting the results of 2nd quarter earnings reports. Second, the market is considering what the Fed will do at their month-end meeting on July 30-31. As a result, we have seen a bit of volatility after hitting all-time highs at the beginning of last week.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, July 22, 2019

 

U.S. corporate earnings are expected to be slightly lower this quarter than in the second quarter of 2018. The estimated decline in earnings growth is 1.9% as of last Friday, July 19th.2 According to Factset Insight, if corporate earnings finish the reporting period with a decline, it will be the first time of back-to-back quarterly earnings declines since the first two quarters of 2016. It is important to keep in mind that the earnings growth in 2018 had a boost from the tax bill passed at the end of 2017. The year-over-year comparisons in 2019 were expected to be challenging.3

 

As we might expect, large companies with a growth bent continue to perform well in 2019. They have outperformed both large value companies as well as small companies. Broad-based international stocks from developed countries continue to lag their U.S. counterparts as well.4 Our investment committee does not see any evidence of that changing soon.

Source: J.P. Morgan Asset Management, Weekly Market Recap, July 22, 2019

 

There are a number of key companies reporting earnings this week, including many from the technology sector. The energy sector is one of six sectors that is expected to report a year-over-year decline in earnings and remains a relatively weak sector for investing in 2019. We will have a better sense of earnings results for the quarter by the end of next week, which is just in time for the next scheduled meeting of the Federal Reserve Board.

 

The market has largely anticipated that the Fed will reduce short-term interest rates at the meeting on July 30-31. Up until last week, the probability (according to Fed futures trading) of a rate cut was 100%. However, there has been better-than-expected economic news in the last two weeks which has dampened the enthusiasm that a rate cut is guaranteed.5 According to Bespoke Investment Group, the expectation of a 25-basis point rate cut is down to 75%. The Fed governors are not allowed to speak publicly about their policies until the next meeting so we will need to keep an eye on the economic news to determine if the market gets what it wants (remember “when bad news is good” from a few weeks ago).

Source: Bespoke Investment Group, The Bespoke Report, July 19, 2019

 

We expect the first estimate of 2nd quarter GDP (overall U.S. economic growth) this coming Friday and the estimates are wide-ranging. Nearly all the estimates are forecast to be less than the 1st quarter. However, there were some reporting issues regarding inventory buildups that may distort the readings between the 2 quarters. First Trust Advisors recently released their expectation for 2nd quarter GDP growth to be 1.8%. However, when adjusting for the inventory anomaly, Brian Wesbury believes that GDP growth is closer to 3.1% annually. Overall, the U.S. economy continues to grow in a reasonable pattern that should support continued earnings growth for U.S. companies.6

 

Many economists will measure the economic reports that reveal information about the future of the U.S. economy and compare them to reports about the current situation. The relationship between “leading indicators” and “coincident (current) indicators” helps us to see if the economy is changing directions. As the chart from Bespoke shows below, the indicators have moved sideways recently but have not turned negative.

Source: Bespoke Investment Group, The Bespoke Report, July 19, 2019

Lastly, we have been asked a few times about the recent performance of gold. Everything from the gold mining companies to the precious metal itself has seen a nice price rally for the last three months. It has been several years since we’ve seen this kind of appreciation for precious metals and many clients are wondering if it’s time to jump back in. We encourage caution until there is a better sense of the new trend.

 

Generally, the price of gold has a strong correlation to the value of the dollar. As the dollar decreases in value relative to other world currencies, the price of precious metals will usually increase. Since the dollar has increased in value over the last several years, the price of gold has been rather stagnant. However, given the expectation of the Fed reducing interest rates, the U.S. dollar has gone down in value relative to other world currencies. The drop in the dollar has helped support higher prices for precious metals.7 Our investment committee is not expecting the drop in the dollar to be a sustained movement for the long-term and is hesitant to recommend allocating significantly to precious metals yet. We will continue to monitor the situation for client portfolios.

Source: Bespoke Investment Group, The Bespoke Report, July 19, 2019

 

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:
1. P. Morgan Asset Management, Weekly Market Update, 7/22/19
2. Factset Insight, Earnings Season Update, 7/22/19
3. Factset Insight, Earnings Season Update, 7/22/19
4. P. Morgan Asset Management, Weekly Market Update, 7/22/19
5. Bespoke Investment Group, The Bespoke Report, 7/19/19
6. Brian Wesbury, First Trust Monday Morning Outlook,7/22/19
7. Bespoke Investment Group, The Bespoke Report, 7/19/19

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