Trade War Impact
We received good and bad news over the weekend. The good news is that our economy has been growing for 121 months since the last recession. The concerning news is that China just reported that they’ve had the slowest growth in 27 years. This shows that we’re starting to see an impact of the trade war and tariffs on the Chinese economy. We are starting to question whether this negativity is going to start flowing over to other economies like ours. We should get a good read on that this week when the corporate earnings report comes out.
This week starts with over 50 of the S&P 500 companies reporting earnings. This is important because the larger companies in the U.S. are not just focused on the U.S. but also focused on global multinational corporations. There’s weakness in China and maybe in Europe as well so you may see that hurting the overall earnings report. While our economy has grown for so long as previously noted, this 2nd quarter, looking back, we’re expecting negative earnings growth. The S&P expectations is a 1.8% year-over-year decline in earnings. Currently, we’re estimating that next quarter we will have a decline as well. Two consecutive negative quarters looks like an earnings recession. That’s something we don’t want to see so we’re hoping that companies come out ahead of that and maybe beat expectations. It’s a small hurdle, -1.8%, but it’s very important hurdle that we get positive. Last year, for example, earnings grew and the market price fell so companies got cheaper and gave us some confidence to be in equities for our clients. This year, if the market goes up while earnings fall that makes the market more expensive. It’s a little harder to see a longer-term growth trend without earnings.
Last week, we talked about June’s job growth being the best since January. This week we want to look at the U.S. weekly jobless claims number that accounts for the week ending on 7/6/19. This number was the lowest it’s been since April. For those who don’t know the U.S. weekly jobless claims is the number of Americans filing applications for unemployment benefits. So, being at a 3 month low, we’re starting to see this labor market really strengthen and hopefully that’ll help boost our economy. On Tuesday retail sales are coming out and that will give us a better indication of how these job numbers ties into the earnings and back into these companies.
Last week we talked about how China is hurting right now, but, as we are seeing it’s not just China. We’re starting to see the shock wave hit other economies. One that we’re looking at is a great “poster child” for that right now is Germany. Germany has just been a juggernaut economy for years, leading the Eurozone of the past few years. Now, you have to remember the German economy is export-oriented and value added oriented. It’s also very diverse. Their GDP growth over the last 12 months was only 0.7% which is unheard of for them. In addition to that, their publicly traded index is called the DAX. One in three of those companies are either having a profit warning, job downsizing, or some level of restructuring. Germany is a lot like us in that most of their economy is small and middle market businesses. However, the large public companies that are subject to a lot of trade and multinational are really down and you just don’t see that normally with an economy like theirs.
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