History May Not Repeat Itself but it Often Rhymes
By John Stoltzfus,
Chief Investment Strategist
What the Markets Are Telling Us
U.S. stock market resilience sending a strong signal
Based on recent performance uncertainty appears to be less of a concern to the US equity market than many widely expressed opinions and concerns might lead one to believe.
Once again good and even improving economic and corporate fundamentals are giving a hard time to holders and believers of bearish opinion and outlook.
Even as trade tensions and related geopolitical rhetoric ramped higher last week, the 10- year Treasury closed above 3% mid-week, the Federal Reserve’s FOMC meeting concluded with no change in monetary policy by the Fed, stocks broadly advanced for the week aided and abetted by better than expected results from tech bellwether Apple, Inc. (AAPL) and Caterpillar (CAT) among others.
Friday’s non-farm payrolls gain came in way below economist surveys (157,000 actual versus expectations for 193,000 jobs added). However, the prior (June) jobs number was revised upward from 213,000 to 248,000, ameliorating concerns about the July jobs shortfall versus expectations that might have otherwise surfaced among investors and observers.
The headline unemployment rate eased from 4% in June to 3.9% in July meeting the most widely followed economists’ survey of expectations. The average hourly wage gained 2.7% year over year in line with the prior month and with expectations for July.
The S&P 500 second-quarter earnings season rolled along. With 405 of 497 companies thus far having reported, earnings were up 27.2% on back of 10.2% revenue growth. One sector has posted triple digit earnings growth (energy), eight of the sectors have posted double digit earnings growth (materials, financials, information technology, telecom, consumer discretionary, health care and utilities), and two have posted single digit earnings growth (consumer staples and real estate). See page 4 of this report for further details on Q2 earnings season.
“We continue to expect that the Fed will lead central banks around the world in remaining highly sensitive to both growth factors and vulnerabilities in the economy.”
As of the end of last week the Dow Jones Industrials, the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (the small caps) and the Nasdaq Composite (weighted some 40% in tech and tech related stocks) were up for the year respectively: 3.0%, 6.2%, 5.2%, 8.9% and 13.2%. For the week ending last Friday they respectively gained 0.05%, 0.80%, 1.3%, 0.60%, 0.96%.
The yield on the 10-year Treasury slipped from its mid-week perch of just over 3% to 2.95% on Friday. While the yield curve remains flat for now the risk of it inverting appears now less likely to us with job and wage growth persistent (albeit it at modest paces), corporate revenues and earnings on an upswing and the potential for some positive progress on trade to surface.
Interim slowing coming from normal cycle unevenness or volatility caused by uncertainties tied to trade issues appear likely to continue to be offset by positive fundamentals for now.
Our outlook remains positive for equities stateside and in the international realm as a result.
Bonds stateside and abroad are likely to face challenges as the Fed and other central banks around the world turn from QE (quantitative easing) to QT (quantitative tightening). That said, we continue to expect that the Fed will lead central banks around the world in remaining highly sensitive to both growth factors and vulnerabilities in the economy as it has been over the last nearly ten years. So far so good when it comes to monetary policy.
Broad diversification and patience remain key to success in position portfolios at this juncture in the global economy and markets.
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