First Half Will Be Hard to Repeat – July 20, 2018

First Half Will Be Hard to Repeat – July 20, 2018

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

First Half Will Be Hard to Repeat

Roughly 17% of S&P 500 companies have reported second-quarter earnings thus far. Of those, 87% have reported a positive earnings surprise and 77% a positive sales/revenue surprise. EPS growth, on a blended basis, might register at the second-highest level ever, at 20.8%, which takes the 12-month forward P/E ratio for the S&P down a notch to 16.5 – near the ten-year average of 14.5.

Leading to the upside (if any) have been the financials, tech, and the transports. However, in the broader market there have been more “accidents” than success stories. The indices finished the week relatively unchanged – though the transports did manage to add about 2% on hyped-up airline forecasts. All in all, I think earnings this season will be impressive, at least on the surface – or at least among those firms in the major indices. But given the markets’ yawn, my guess is that both sustainability and quality of earnings is a big question mark moving forward. With rates rising and the phasing out of $300 billion in natural disaster spending (since September of last year), there should be a tremendous drag on earnings and speculative forces in the second half.

The economic data released this week suggested as much. In June, Retail Sales slowed to 0.5% from a 1.3% gain in May, Industrial production fell to 0.6% from 1.1% in April and 1.54% in October last year. Housing Starts collapsed 12.3% and Permits lost 2.2%, both of those indicators are at par with levels in 2015 and 2016. In any case, I believe it was this data that prompted worry among a few House Committee members at the latest FOMC meeting. In that meeting, Powell was asked how the Fed would handle an environment defined by high rates of inflation (caused by higher market rates) and low economic growth. Powell responded only with “it would be very challenging.”

Turning back to the action, fixed income markets were essentially mixed early on. By mid-week they began to slide, finishing the week with marginal losses. Any number of things could have caused bonds to slip, but it appears that Trump’s renewed discontent with China over trade/yuan devaluation and the Fed’s tightening bias may have triggered the selling. This helped the metals rebound/stabilize on Friday, and took the wind out of the sails of the dollar. Oil continued to slide due to growing US supplies and subsequent speculative unwinds. Next week will be light on economic data and heavy on earnings. It should give us some clue as to whether or not the bulls can continue to disregard what I believe are mounting obstacles.

Best Regards,

David Burgess
VP Investment Management


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