Markets, Economy

Weekly Kickstart (12/17/2018-12/21/2018)

12/17/18 8:00 AM

iStock-626627280.jpgStocks continued lower last week, as the S&P 500 fell by 1.26 percent to 2,599.95. That left the benchmark index down 2.76 percent 2018-to-date, and 11.29 percent below the all-time high hit just a few months ago. There were several rally attempts last week, but they all failed to gain traction as traders repeatedly sold into strength due to the uncertainty still surrounding a possible government shutdown, the trade negotiations between the United States and China, and this week’s announcement on monetary policy from the Federal Reserve. Another reason why some investors may be reluctant to step in and take advantage of the market correction is the sustainability of corporate profits. Indeed, 77 percent of the companies listed on the S&P 500 reported earnings per share (EPS) for the third quarter of 2018 that exceeded analysts’ forecasts, according to updated FactSet data, and 62 percent beat revenue estimates. Both of those figures are well above the 5-year average and close to the best levels ever recorded. Operating EPS growth is also at an 8-year high, and profit margins are about as good as they have ever been.

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Despite these strong numbers, stock valuations in many ways are based more on expected growth than past performance, so it is understandable that some investors have started to curb their enthusiasm with earnings and sales data already as good as one could hope for this late in the economic cycle. Moreover, the latest forecasts have S&P 500 companies reporting earnings growth of 12.8 percent during the fourth quarter of 2018. That would be the 5th straight quarter of double-digit growth but down considerably from 26.0 percent in Q3. Further, analysts see EPS growth falling to just 4.3 percent next quarter and 8.3 percent for all of calendar year 2019. As dour as these outlooks may seem, an alternative interpretation is that analysts have become overly pessimistic and set up a scenario for a lot of upside surprises during the next corporate earnings season. Similar catalysts for a short squeeze could come from a sudden resolution to the trade war or other positive development, but numerous unknowns (risks) remain. Add to this the fact that trading volumes are likely to be relatively low around the upcoming Christmas and New Year’s holidays and it should not be too surprising if intraday volatility remains elevated. Any regular investors concerned about navigating this environment should consider consulting with a professional financial advisor and as always, we are here to help with any questions you may have.

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To recap a few of the things we learned about the economy last week, the positives included that the 30-year mortgage rate fell to a 3-month low, mortgage applications rose, trade-related inflation pressures moderated, industrial production rebounded, capacity utilization improved, total job openings increased, initial jobless claims plunged, and the number of unemployed Americans per job vacancy fell to a record low. As for the negatives, factory output disappointed forecasts, small business owner optimism cooled, the “quits rate” edged lower, annual retail sales growth declined, and core measures of both wholesale and household inflation pressures firmed. This week the pace of economic data slows down even further but there are still a few important reports on manufacturing, housing, and consumers scheduled to be released, along with the potentially market-moving announcement on monetary policy from the Federal Open Market Committee (FOMC) on Wednesday.

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**A more detailed snapshot of the U.S. economy can be found here.**

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Sources: Econoday, FactSet, Pension Partners, FRBSL

Post author: Charles Couch

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