This weekly report presents insights from our Global Investment Management team.
U.S. stock markets are continuing their upward surge on solid earnings numbers and positive comments from both President Trump and Chinese President Xi Jinping regarding U.S.-China trade talks, while the declaration of a U.S. state of emergency was met with a muted response by markets.
The most recent round of trade discussions ended with both leaders touting important progress, noting broad agreements on key trade issues and a “consensus in principle.” However, disagreements over forced technology transfers and intellectual property rights, as well as ongoing concerns over cybersecurity threats, specifically from Huawei equipment, remain unresolved.
The trade truce deadline will be reached at the end of this month; however, President Trump has stated he is willing to append a 60-day extension to negotiations. De-escalation in the trade dispute has been a notable positive for financial markets, with the S&P 500 return climbing into the double-digits and gaining 11.41% so far in 2019.
An impressive gain in stocks during the first few months of the year has also been fueled by earnings coming off record highs. The final earnings season of 2018 will be wrapping up in the next few weeks, but so far the numbers continue to be promising. Data aggregated by Bloomberg shows that of the 429 companies within the S&P 500 that have reported, sales have risen 6.35% and earnings have grown 10.87%. While fourth quarter earnings increases have fallen short of the near 25% growth experienced in the prior three quarters of 2018, the markets seem to be reacting well to continued double-digit expansion even as tax cut effects fade and geopolitics remains a key risk.
Investors seem to be taking time to digest the recent political news coming out of the White House and Congress, which saw another government shutdown narrowly avoided by passage of a spending bill that included a compromise over border security. The deal resulted in $1.3 billion for border fencing compared to the $5.7 billion the president had insisted on. Last Friday, citing threats to the southern border of the United States, President Trump declared an official state of emergency. Doing so grants the president extraordinary executive powers such as control of the internet and the ability to declare martial law, while removing many of the legal limits on presidential power.
The administration may circumvent lawmakers to seize roughly $6 billion in military funding to create a barrier on the U.S.-Mexico border. The declaration has been met with a subdued response from financial markets, but has been harshly criticized by members of Congress and attorney generals from 16 different states who have filed lawsuits challenging the potential misuse of executive authority.
Our team sees changes on the horizon for financial markets, particularly as certain geopolitical events like the trade dispute and Brexit come to a head in the first few months of the year. While financial fundamentals remain fairly upbeat, we believe many of the benefits for corporations, mainly decreased tax bills, will fade out in 2019. For now, barring any political blowups, we see stocks maintaining a fairly steady course over the near term.
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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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