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Earnings have been strong but the markets are not reflecting current economic realities

by Fortem Financial July 23, 2018

We continue to believe that there is a disconnect between the strong US economy / robust corporate earnings and the wall-of-worry (trade, yield curve, debt levels, mid-term elections, etc.). Politics are trumping economics this midterm election year, but our base case remains intact: investors are underestimating the stimulative effects of fiscal stimulus and regulatory easing while overestimating the potential negative impacts of a trade war, a rotation (not a fade) in global growth is underway, and a capex surge is brewing. The supply-side of the economy is now in focus and investments that will increase productivity will result in higher wages.

Capex spending is up year-over-year and is finally being rewarded by the market over share repurchases. Companies spending on capex are outpacing the S&P by 200 basis point year-to-date. It is still early, but an emphasis on capital spending could greatly extend the business cycle as investments boost productivity, earnings and wages while keeping unit labor costs low and the Fed accommodative.

Last week, the Russell 2000® Index (+0.58%) led the major indices; the Dow Jones Industrial Average and the S&P 500® Index rose modestly (+0.15% and 0.02%, respectively) while the Nasdaq Composite posted a slight (-0.07%) decline. Earnings reports for the week were generally good; those which missed expectations cited company-specific events rather than overarching economic factors. For example, Netflix lost approximately 10% after falling well short of its projections for new subscribers. In contrast IBM and Microsoft beat revenue and earnings expectations; both reported surging growth in their analytics and cloud storage strategies.  Financials companies including Bank of America and BlackRock continued to report strong results although the investors are closely monitoring the sector out of apprehension that the Federal Reserve might slow interest rate increases. Other bellwether stocks, including Honeywell, Johnson & Johnson, CSX Corporation and United Continental, beat earnings estimates. Company executives have reported strong demand while expressing some concern over the potential impact of trade tariffs. They are likely to take a more cautious attitude until they can assess the effect of emerging trade policies on their businesses.

Trade continued to dominate the headlines.  On Friday, President Trump announced his willingness to place tariffs on all $505 billion in Chinese goods imported to the U.S.; he also stated that he believes China and Europe are engaging in currency manipulation to lower their currencies which would effectively lower the prices of their exports. The various policy initiatives appear based on current market conditions without reflecting the impact of behavioral changes in response to policy changes. So far, the markets continue to reflect the assumption that the tariff disputes will reach a negotiated resolution. Elsewhere, oil prices remained volatile due to uncertainties about the added production by Russia and Saudi Arabia to offset production declines from Iran and Venezuela.  Last week’s higher oil inventories, as reported by the EIA, may be more of an anomaly than a signal of a more worrisome increase in U.S. production levels.

The strength of the global economy has continued to support the markets’ advance despite the political uncertainties related to trade sanctions and energy production.  Also, many companies are reporting higher earnings due to the benefit of tax reform; they are crediting the lower corporate tax rate in supporting various growth initiatives. Many companies report second quarter earnings this week; investors will closely monitor earnings reports and political developments during what is otherwise a seasonally slower period in the markets.

Source: Strategas, Pacific Global Investment Management Company

Chart reflects price changes, not total return.  Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week's Headlines: 7/23/2018

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Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Forward looking statements are based on current expectations and assumptions, the economy, and future conditions. As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict. Actual results may differ materially from the anticipated outcomes. Carefully consider investment objectives, risk factors and charges and expenses before investing. Fortem Financial is a registered investment adviser with the SEC. Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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