While the market has paused over recent days, the equally-weighted S&P has continued to outperform and reflects an improvement for the “average stock.” The equity markets started last week on a positive note before retreating as trade concerns and Brexit dampened investor enthusiasm. The major indices rose fractionally: the Nasdaq gained 0.55%, followed by the Russell 2000® Index (0.29%), the Dow Jones Industrial Average (0.17%) and the S&P 500® Index (0.05%.) Trade concerns took center stage as the European Commission lowered its 2019 growth forecast for the euro zone from 1.9% to 1.3%; the announcement noted a drop in exports to China along with a lack of progress in trade negotiations since the region agreed last summer to a trade truce with the U.S. Uncertainties include the potential for the U.S. to impose additional tariffs next month, and the upcoming Brexit date in late March. U.S. trade negotiators are scheduled to resume discussions this week in China. Comments suggest that a trade deal is a “pretty sizable distance” away; as a result, President Trump has delayed his meeting with President Xi until after the self-imposed early March deadline. Investors reacted negatively as fears that additional tariffs scheduled to take effect on March 1 might not be delayed pending an agreement.
Companies are deferring investments and becoming ever more cautious as the March 29 Brexit deadline nears. Each of the four scenarios we previously mentioned remains possible: the UK parliament could vote to cancel its “leave” decision and remain a member of the EU; the UK could extend the deadline and/or issue another referendum; or the EU members could vote to delay to process. A luxury auto dealer with a major presence in the UK recently indicated that consumer demand remains strong even in the absence of a clear path forward. Each of these global trade issues may well come down to eleventh hour resolutions as negotiators seek the most favorable outcomes for their side.
So far, with earnings results from 66% of companies in the S&P 500®, the earnings growth rate of 13.3% suggests a fifth consecutive quarter of double-digit growth. Notably, companies with less than 50% of their sales originating outside the U.S. are reporting twice the earnings growth compared to multi-national firms. Transportation stocks (including trucking, rail and marine), have reported solid results with trends for 2019 remaining favorable; the sector is recognized as a leading indicator of economic growth. In earnings conference calls, many executives convey a positive-yet-cautious message due to the uncertainties related to trade and Brexit; they are increasingly outspoken in urging the U.S., Europe and China to finalize trade agreements sooner rather than later.
Market focus will soon shift from earnings reports to economic data and geopolitical events, especially Congressional action to avoid another government shutdown which could take effect on February 15th. These uncertainties may cause continued market volatility and may disrupt the recovery from December lows; and yet, the level of investor concern over these issues may pressure international leaders to find resolutions.
Source: 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.
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