Earnings & Warnings

Trade Charade

On Thursday, we got news that US officials were thinking about easing some of the tariffs against China, which sent stocks higher. Then later that day, the White House came out and said loljk that’s not actually happening now, which brought stocks down again. But then China extended an olive branch on Friday by offering to increase its purchases of US goods by more than $1 trillion over six years with the goal of reducing the annual US trade deficit to zero, which sent stocks soaring again on Friday. This might go down as the most “on again, off again” relationship story of 2019, brb let me grab my bowl of popcorn to watch the drama unfold.

Moral of the story: If you take away the noise on this issue, we’re moving in the right direction and should see a resolution before the March 2nd deadline. Providing a resolution would allow companies to finally step out of the uncertainty they’ve been operating in for the last few months and start business as usual, which will be a huge boost to business sentiment. 

Feeling Sentimental 

The University of Michigan produces a monthly consumer sentiment index to assess consumer attitudes toward the business climate, personal finance, and spending. The index is viewed by many as a leading indicator as it can be a strong read-through of future consumer spending. The latest print for this index was published on Friday and indicated a pretty sharp decline, bringing the index to its lowest level since October 2016. If you think about all the things that are happening right now – a government shutdown, trade tensions with China, volatility in the stock market, slowing global growth, potential uncertainty with the Fed – it’s not at all surprising. If it wasn’t for the strong labor market right now, this index could have dropped in an even bigger way.

Moral of the story: While the index isn’t suggesting that a recession is imminent, it is a sign that consumers could notably pull back spending and given consumer spending accounts for about two thirds of GDP, this could contribute to slowing economic growth for the US. The shutdown also means that we didn’t get data this week on retail sales, so we haven’t been able to verify the impacts of sentiment on the economy yet.

Earnings Are Here

This week was the beginning of earnings season, and the market was looking to company management to provide some guidance on what to expect for the coming year. The big earnings releases this week came from banks and airlines. The five big banks on Wall Street – Goldman Sachs, Citigroup, Bank of America, Morgan Stanley, JPMorgan Chase – all reported earnings this past week and, despite struggling at the end of 2018 due to the large stock market correction, largely indicated the consumer was in a good place. However, management did raise caution about the dysfunctional government, urging leaders to strike a more collaborative tone, without which companies could see a prominent impact to growth in 2019. In terms of airlines, we heard from Delta and United, and Delta’s outlook was fairly bleak for the beginning of 2019, again citing the government shutdown as a large contributor. Delta expects to miss out on $25m of revenue from government-related travel that was canceled because of the shutdown. 

Moral of the story: After 28 days, this historic government shutdown is starting to raise some serious concerns and will surely have a notable impact on earnings growth for companies in the first quarter. This is on top of the fact that first quarter numbers this year are going to be compared to really strong numbers in the first quarter of 2018 that were seriously boosted by tax reform. Cue the negative earnings revisions