Investment Commentary – August 21, 2019

Year to Date Market Indices as of Market Close Aug 21, 2019
• Dow 25,962 (11.30%)
• S&P 2,900 (15.70%)
• NASDAQ 7,948 (19.79%)
• Gold $1,509 (17.48%)
• OIL $56.68 (23.75%)
• Barclay Bond Aggregate (8.68%)
• All World Index (12.42%)
• Fed Funds Rate 2.25 (-0.25 rate cut 7/31/19)
• US Real GDP Growth 2.1 Q2/2019 (Down from 3.1 in Q1)

Recession not on horizon, Fed’s Daly says

San Francisco Fed president says interest-rate cut was not sparked by ‘impending downturn’
The U.S. economy isn’t headed for recession right now, San Francisco Fed President Mary Daly said Tuesday.

“When I look at the data coming in, I see solid domestic momentum that points to a continued economic expansion,” Daly said, in written answers to questions on the Quora website.

Daly said that there are “considerable headwinds” facing the economy and she was worried that they are contributing to a fear that a downturn is right around the corner.

“So one thing I’m looking closely at is whether the mood gets so out of sync with the data that the fear of recession becomes a self-fulfilling prophecy,” she added.

Read: Here’s why the bond market isn’t as worried about a recession as you think

President Donald Trump confirmed Tuesday that the White House is mulling a payroll tax cut to give the economy a shot in the arm.

Daly said she supported the Fed’s interest-rate cut in July as “an appropriate recalibration of policy” in response to the headwinds facing the economy.

She stressed her support for the rate cut was not based on her seeing “an impending downturn on the horizon.”

Daly has been president of the San Francisco Fed since last October. She is not a voting member of the Fed’s interest-rate committee this year.

Asked if the U.S. was “doomed” to low inflation, Daly replied no.

She said the Fed has tools it can use once it better understands what is driving low inflation.
Fed Chairman Jerome Powell is scheduled to discuss challenges facing monetary policy in a speech from Jackson Hole, Wyoming, on Friday.

Around the web

Tariff talk: As earnings season wraps up, a growing number of executives appear to be concerned about the potential impact of the U.S.-China trade conflict on their businesses. The word “tariffs” was mentioned in 28% of second-quarter earnings conference calls with analysts, according to transcripts reviewed by FactSet that cover earnings reports issued through August 8. That’s up from 21% at the same point in the previous quarter’s earnings season.

Policy talk: Investors will be closely watching for indications of a possible monetary policy shift when Federal Reserve Chairman Jerome Powell delivers a speech on Friday at an annual Fed symposium in Jackson Hole, Wyoming. On Wednesday, the Fed is set to release minutes from its most recent policy meeting, when it cut rates for the first time in more than a decade.

Trade concession: Stocks rallied on Tuesday after the Trump administration sought to ease the recent escalation in trade tensions with China. The administration partially suspended its latest round of tariff increases, pushing back the effective date for tariffs on about $156 billion in Chinese goods from September 1 to December 15.

Inversion aversion: Much of the week’s volatility was driven by a bond market phenomenon that hadn’t been seen in more than a decade. The yield of the 10-year U.S. Treasury bond fell on Wednesday to 1.60%, below the yield of the 2-year Treasury. The last time there was an inversion between the 2- and 10-year yields was in 2007, prior to the global financial crisis.

JP Morgan Economic Update:

The first estimate for 2Q19 real GDP growth came in at 2.1%, a little stronger than the consensus expectation of 1.9%. Real government spending and real consumer spending were positive contributors to growth, while a decline in business fixed investment, slower inventory growth and weaker trade detracted. Looking forward to the third quarter, inventory growth should decline further while consumer spending and government spending will likely grow at a more moderate pace and trade numbers should continue to be weak. These dynamics were echoed in last week’s data, in which industrial production contracted 0.2% m/m, but retail sales rose a healthy 0.7% m/m. Although consumption still appears strong, consumer sentiment slid to 92.1 from 98.4.

Nonfarm payrolls increased by 164,000 in July, in line with consensus expectations; however, revisions to prior months brought job gains down by 41,000. The unemployment rate was steady at 3.7%, and the labor force participation rate ticked up to 63.0%, as 370,000 workers joined the labor force. Wages grew at 0.3% m/m and 3.2% y/y for all workers (0.2% m/m and 3.3% y/y for production and non-supervisory workers). While a steady labor market provides some countervailing strength to otherwise deteriorating economic data, it is important to note that the job market is a lagging economic indicator and could begin to slow in the coming months.

With 456 companies having reported (92.4% of market cap), our current estimate for 2Q 2019 is $40.40, and EPS growth is at 4.5% y/y. Thus far, 74% of companies have beaten on earnings, while 42% have beaten on revenue. While margin growth is expected to contract slightly, our current estimates show margins remaining healthy at 11.6%. Slower global growth, lower oil prices, a stronger USD, margin pressures and fading effects from tax reform will continue to weigh on earnings this quarter. We anticipate low to mid single digit earnings growth for 2019 as a whole.

Upcoming this week:
Friday: U.S. Federal Reserve Chairman Jerome Powell speaks in Jackson Hole, Wyoming

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.