Until recently, it felt like the greatest of times as the nine-year long bull run galloped on, but given the Dow’s latest 400-point plummet, a key question becomes is the worse yet to come for US equities?
Harbingers of doom are hard to find when the US economy is booming. Less Dickens and more Goldilocks. Low unemployment, as most recent jobs data attests and while wage growth is a bit pallid, there are signs of a bit more bloom as average hourly earnings perked up a bit.
Historically low interest rates have been a boon too, even as the Federal Reserve is considering a rate rise as inflation approaches its 2% target rate. The economic story tells of good pre-conditions for corporate growth.
Market confidence speaks of a more sombre mood. Despite buoyant corporate earnings, analysts are projecting earnings estimates for the S&P 500 flatlining out to the medium term. Consensus figures for earnings per share according to Bloomberg for the S&P 500 rose 2.2% in the past four weeks for the year but estimates were up just 0.1% for 2019 and 0.2% for 2020.
Still strong economy
BTIG’s chief equity and derivatives strategist, Julian Emanuel, suggested that economic growth was “still solid.” However, equities stumbled this week as bond prices rose 3% for the first time in the past four years.
When bond yields climb, investors expect higher borrowing costs for companies and consumers and it did send a shock wave through the markets. Tuesday’s pull back has to be placed in the context of a still strong economy.
US equities are in for a more volatile period perhaps as Tuesday’s stock market performance illustrates, but there’s still time left in the earnings reporting period to determine what the market will conclude for the stock markets and economy.
Earnings results so far have been strong given the record high profits rolling out by banks and other big names but a restless market indicates bears may well be on the approach.
Investor attention has turned to a flattening yield which could lead to an inverted yield curve, which can predict recession and thereby a tougher time for equities.
Caterpillar, maker of industrial equipment across a number of sectors such as mining, energy and construction, acts as a gauge for the American economy announced record first-quarter profit and lifted its 2019 outlook.
But the market response was to nosedive after CFO, Brad Halverson, Caterpillar said, “The outlook assumes that first quarter adjusted profit per share will be the high watermark for the year.”
What Halverson suggested is that markets have taken on board a strong first quarter but are questioning what corporates will deliver over the next three quarters. Can they keep up the momentum?
As good as it gets
Emanuel expresses a bit of caution in his outlook saying: “There’s a bit of a messaging problem. If you thought about it as a hedge fund investor, if you heard an investment say this was the high water mark, you do would do the same thing that the market did to that stock and the rest of the market yesterday you would sell.
“For us, it could be the actual peak of the growth numbers because the first quarter growth right now are coming in close to 25%,” he said.
Emanuel sees that figure as a “tax distortion” and doesn’t see it as sustainable. He expects organic growth to occur in the mid teens for the rest of the year and that “growth trajectory is still going to be solid.”