The S&P 500 gained 0.6% last week and reached an all-time high (when dividends are included). A few banks reported solid earnings and indicated loan demand remains positive. Investors cheered both developments. The global MSCI ACWI gained 0.5% based on strength in global stocks. The Bloomberg BarCap Aggregate Bond Index dropped 0.1%.
Key Points for the Week
- Earnings season kicked off on Friday.
- Expectations are for an earnings decline this quarter and modest growth this year.
- The S&P 500, when including dividends, eclipsed the high set in September 2018.
No major breakthroughs were achieved between the U.S. and China or on Brexit. The inflation outlook remains tame. The Consumer Price Index rose 0.4%, but volatile energy and food prices caused the increase. Excluding these more volatile elements, inflation rose only 0.1%. Companies reporting earnings will be a key focus this week.
Earnings season is upon us. A few key banks kicked it off on Friday with generally positive results. Earnings growth is expected to slow in 2019. Current expectations are for an earnings decline of 4.3% in the first quarter and modest growth later in the year. Last year, earnings grew rapidly because the corporate tax cut slashed the amount many corporations paid in taxes.
The first quarter’s earnings weakness is attributable to an earnings decline in technology and energy stocks, which earned less because oil prices have fallen over the last year. U.S. corporations also earn a large share of their profits overseas, and the dollar’s strength makes foreign profits worth less when converted into dollars.
Margin pressure is also a potential risk to investments. S&P 500 companies earned the highest margins on record in 2018, but labor costs are posing a threat. The strong employment growth in the U.S. has started to fuel wage increases that are higher than the rate of inflation. For workers, this is tremendous news. For corporations, this means they will face higher costs. Labor accounts for roughly 60% of all corporate costs, so increasing wages can reduce the bottom line substantially.
These factors are affecting earnings already. According to FactSet, corporations are mentioning foreign exchange and labor costs as the top two factors negatively affecting earnings this quarter or potentially affecting them later this year.
The next couple years will likely see a decreased emphasis on fiscal and monetary policy and more emphasis on company fundamentals. Assuming the Fed remains on hold, earnings growth will take on a greater role determining whether markets move higher or lower.
A father in the D.C. area posted a picture of his iPad that went viral. The picture shows the iPad is disabled for 25 million minutes, or around 48 years. Apparently his 3-year-old child unsuccessfully tried to log in one, or 20, too many times. The good news is time flies by fast, so 2067 should be here in no time.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds
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