This Spring, the second page of Haverford’s Economic Slideshow highlights many of the positive data points supporting this year’s 16% gain in the S&P 500 (and 24% gain from the lows of Christmas eve!). In our opinion, the dovish Fed, supported by a lack of inflation and slowing GDP, is responsible for much of this rally. Items towards the bottom of the “What’s Gone Right” section below represent wildcards that may or may not be fully priced into the market. Earnings expectations have stabilized, but a positive outlook from corporate management is probably needed to move stock prices higher. The official start to earnings season came Friday; J.P. Morgan and PNC’s results were well received while Wells Fargo’s guidance was more muted.
At the top of the “What to Watch” section below, we place wage growth. A duel edged sword, robust wage growth is great for the consumer but overly hot wage growth crimps profits and may force the Fed to be more hawkish. The flat yield curve also bears watching. A flat but stable yield curve is fine for the markets, but an inversion is the signal of a policy mistake and possible recession. The weakness in Europe and Japan is not new news, but has become more pronounced during the past few months. A resolution of trade tensions won’t just help China, but it will also benefit their largest trading partners in Europe.
Finally, the list contains several policy concerns, such as tariff uncertainty and the politics of maintaining last year’s tax cuts for the long-term. Unfortunately, the next election cycle is already upon us. We don’t let politics get in the way of investing, but we also can’t turn a blind eye to sectors and industries in Washington’s cross-hairs.
What’s Gone Right?
- A Fed rate hike is very unlikely in 2019 and quantitative tightening will end sooner than previously expected.
- U.S. GDP is slowing but still growing.
- Inflation is moderate and below the Fed’s 2% target.
- Business and consumer sentiment surveys are still strong, albeit down from peak levels.
- The robust job market continues.
- Trends are stabilizing in interest sensitive sectors: better housing data, rebound in auto sales, lower mortgage rates, a pickup in bank lending.
- Negotiations appear to be making good progress towards a China trade deal.
- Chinese domestic stimulus may be taking effect; we expect their GDP growth to stabilize.
- S&P 500 earnings revisions have bottomed. Positive year-over-year earnings growth is expected in 2H19.
What to Watch?
- Accelerating wage growth is a duel edged sword.
- The yield curve (spread between long and short dated Treasuries) is at its flattest point since 2007.
- Europe and Japan are struggling for economic growth, particularly in manufacturing.
- A new trade spat with Europe over autos would be costly.
- Global bond markets are once again flirting with negative rates.
- Tax reform has yet to revive U.S. Capex cycle.
- The 2020 Election cycle is already spurring anti-business fiscal policy proposals.