So here we are coming to the end of another earnings season. I thought this would be a good time to shoot out a quick update on the market and some of the things we are keeping an eye on.
Corporate Earnings Update: At the end of the day, it is how profitable a company is or how profitable they may be in the future that will drive their stock price.
- Earning expectations have been falling over the past several months. On December 31, the estimated earnings growth rate for the full year of 2016 was 5.9%. By March 31, the estimated earnings growth rate had declined to 1.3%. By June 30, the estimated earnings growth rate for the year had decreased to 0.1%. (1)
- According to Factset Research, the first quarter actual, year-over-year earnings decline reported by the S&P 500 was (-6.7%). For the second quarter of 2016, the blended, year-over-year earnings decline for the S&P 500 stands at (-3.5%). For the third quarter of 2016, the estimated earnings decline stands at (-1.7%). While early estimates for Q4 are currently positive, there is little doubt that will change once the quarter begins, as that has been the pattern for the past several quarters (1)
- Although we hope to see earnings improve, an earnings decline in Q4 would not only be the sixth straight quarter of declines, it would make 2016 the second full year of negative earnings growth since 2008 which could support the fact that the economy is either in or near a late cycle business cycle.
Geopolitical and Macro Economic News:
- Brexit? What Brexit? But seriously, it will still take some time to determine the extent of potential ramifications to the global outlook from Britain leaving the EU and whether or not other countries will follow. In addition, several recent forecasts, including those from Credit Suisse and Barclays, suggest that Britain is already in a recession.
- First-quarter activity in Japan came in slightly better than expected preventing the economy from falling into recession, yet uncertainty about the health of the Japanese economy persists.
- In China, the near-term outlook started to improve during the first quarter due to recent policy support. Though just last week, weaker-than-expected data has reignited concern over growth in the world’s second largest economy.
- Here in the U.S. we are playing the waiting game. We are going to be watching to see how the elections play out over the next couple of months, while waiting to see how the Federal Reserve Bank responds to the most recent economic data and whether they will tighten monetary policy and raise rates.
- The Federal Reserve (Fed) should take notice of the July jobs report. The U.S. economy added 255,000 jobs in July, far exceeding the consensus estimate of 170,000. The June number was also revised up from 287,000 to 292,000. Job growth over the past three months, year to date, and over last 12 months is still averaging right around 200,000, more than enough to tighten the labor market, as well as push up wages and ultimately inflation. Participation rates are still at all time lows.
Our View of the Market:
We feel the U.S. business cycle is in the more mature segment and with continued political and policy uncertainty, our expectation is to see continued market volatility.
In the late cycles we tend to see the most mixed performance of any business cycle phase. We prefer to stay defensive and add inflation-resistant assets such as commodities, energy stocks, short-duration bonds. These types of securities typically perform relatively well in the late cycle.