Light at the End of the Tunnel
Early Friday afternoon, we finally got news that Congress had reached a conclusion to temporarily reopen and fund the government for three weeks, and the bill was signed by President Trump late Friday night. Once the government opens, both parties are expected set up a conference committee to propose an appropriations bill for Homeland Security. Of course, the President has threatened to shut down the government again if he doesn’t get funding for his wall (or just declare a national emergency and build the wall without Congressional approval). Time will tell whether legislators can find a productive resolution, which could also include a potential fight over the president’s power to declare a national emergency.
Moral of the story: While stocks did end the day higher, the market didn’t seem to reward legislators for this bandaid solution complete with further policy overhang as stocks ended the day pretty much where they were at about 1:00pm when we first heard the news about the government shutdown coming to an end.
What Happens in the Alps…
This week’s hottest ticket was for the annual World Economic Forum in Davos, Switzerland, which brings together top leaders from politics, business, civic society, and academia to shape global, industry, and regional agendas. I know it sounds nerdy, but the drama was all there – John Kerry told Trump to resign, George Soros threw shade on Chinese President Xi Jinping, Matt Damon called for a Biden 2020 ticket. Anyway, sentiment among business leaders this year was fairly dim, with some of the largest hedge fund managers forecasting a recession in 2020 in the context of slowing global growth. This isn’t surprising given the IMF cut global growth forecasts on Monday due to weakness in Europe and some emerging markets.
Moral of the story: While concerns about global growth are valid, the US seems to be holding up better than sentiment would indicate as of now. Earnings season has been largely positive, the consumer seems to be in decent shape, the labor market is still as strong as ever, and we would need to see a lot more worrisome data to think a true recession is actually looming. The big wildcard in this remains the Fed, which is currently hibernating, but any sudden movements on monetary policy could spook the market.
Earnings are here (part 2)
Earnings season is officially in full swing as the market heard from over 300 companies across many business lines this week. Technology giant Intel disappointed and some of the blame here went to a slowdown in China. Starbucks topped expectations because of sales from holiday-themed drinks (apparently we really like to spend $5 on what smells and tastes Christmas in a cup). Consumer goods company Proctor & Gamble posted great results and raised their guidance for 2019, adding to data supporting the strength of the consumer.
Moral of the story: About 75% of companies that have reported so far have exceeded market expectations, compared to a historical 64%, which bodes well for market sentiment in general. The large names are blaming any weakness on slowing global growth, especially in China – which creates a strong case for an amicable resolution to the trade tensions with China. If the US enforces harsh tariffs on China, the slowing economy there could deteriorate at a much faster pace, and we would feel the impacts through US companies in a big way.