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Market Perspective - July 2018


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Market Perspective - July 2018

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Market Perspective - July 2018

  1. 1. Market Perspective – July 2018 Experience Insight Impact Overview: Recent headlines regarding a potential global trade war have put a dent in equity performance around the world, with Emerging Markets feeling the worst of the impact as currencies fluctuated. This Market Perspective dives further into the real impact on earnings and economics of a disruption in global trade. Although time will tell, we caution that the trade headlines are rapidly changing. Using a long-term perspective, the current headlines may be more noise than substance. 1
  2. 2. Currency Fluctuations Have Been Material Experience Insight Impact 2 While the dollar has been in a long-term downtrend, the recent tariff headlines (which began in April) have caused more than a 5% rally in the U.S. dollar. This has put pressure on International securities more broadly. Longer term, with fiscal stimulus abound and deficits growing, the expectation for a weaker dollar persists. Emerging Markets tend to be correlated to the U.S. dollar and accordingly, have been weak. Source: Bloomberg
  3. 3. Earnings Growth Projections Experience Insight Impact 3 Last month, we showed the above chart which suggests 2nd Quarter earnings will continue to advance more than 20%, even with the noise surrounding tariffs. Source: Bloomberg
  4. 4. Labor Markets Remain Strong Experience Insight Impact 4 Recent data from employment reports also suggest companies are not pulling back on hiring at this point due to global trade concerns. Jobless claims remain near cycle lows, as does the unemployment rate which is hovering near 4%. Source: Bloomberg
  5. 5. Tariff Impacts Remain A Manageable Albeit Negative Headline Risk Experience Insight Impact 5 The figure above (left) shows that the impact of the Tariffs, while not immaterial, are also not currently impactful. On the right is the market cap weighted revenue exposure to China of S&P 500 companies. Once again, while not immaterial, 6.6% exposure is reasonably small given the impact would not be more than a small fraction of those sales (which largely are going to get passed along to U.S. consumers).
  6. 6. Headline Risk Is Partially Offset By Buybacks (And The Positive Impact On EPS) Experience Insight Impact 6 Share Repurchases for the first half of this year are close to double that of prior year’s results, which mathematically should help boost overall earnings growth. Source: JP Morgan
  7. 7. Overall GDP Growth Remains Strong Experience Insight Impact 7 The current estimate for GDP growth in the 2nd Quarter from the Federal Reserve Bank of Atlanta is 3.9%, an above-trend number which has remained robust despite the near-term noise. We will be watching future quarters to see if the underlying components begin to weaken, as the global trade headline risk lingers.
  8. 8. Market Perspective – July 2018 Experience Insight Impact Conclusion: While global trade concerns have put a damper on global equity markets for now (e.g. from their highs, the S&P is off 3-4% while the more industrial focused Dow Jones is down 7+% and global stocks even more), the underlying fundamentals have not seen much, if any, impact yet. We will be aggressively monitoring the situation to determine if changes are warranted. Our focus remains long-term for our clients and as we try to separate the noise from the fundamentals, we will adapt portfolios to the ever-changing world. 8
  9. 9. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 9