What’s on Tap: Investors Focus on Economic Facts

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  • China Tariffs Hit Home: Direct-to-Consumer Goods Targeted

  • Policymakers, Consumers Confident as Economy Continues to Expand

  • Looking Ahead to Unemployment, Manufacturing and Service Sector Data

Except for a number of highly politicized and polarizing foreign and domestic whirlwinds, economic and market news was generally positive this past week. (Tesla investors may disagree, but that’s an entirely different story.) Overall, fundamental indicators continue to reflect a moderate growth path ahead. Interest rates, even after a hike this week, remain low by most historical measures.

We believe that earnings drive stock prices over time. Though it is still three weeks until we get a look at the bulk of third-quarter earnings reports, analysts’ expectations are for a 19% increase in profits from the same time last year. Three weeks may feel like a long time in this myopic media age, and headlines will likely buffet us with any number of superfluous events between now and then. In an information vacuum and with markets near record highs, traders have been known to react to every nuance they perceive will give them an edge. Yet no matter how volatile the markets may or may not become in the near-term, it’s the longer view that drives our investment discipline, process and, ultimately, your profits.

We don’t see any major cracks in the slow-to-moderate-growth economic expansion, but that doesn’t mean that pressure points don’t exist and fissures can’t suddenly appear. The question, however, about when and where a turn for the worse occurs remains in the realm of guesswork.

For the year through Thursday, the Dow Jones Industrial Average has returned 8.8%, while the broader S&P 500 has gained 10.6%. The MSCI EAFE index, a measure of developed international stock markets, is down 0.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.46% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.6% for the year.

China Tariffs Hit Home: Direct-to-Consumer Goods Targeted

With Monday’s imposition of a 10% tariff on another $200 billion of Chinese goods, the U.S. has now imposed levies on a total of $300 billion of imports, about 10% of all trade crossing our borders. And that 10% duty on Chinese goods will increase to 25% in January. Trade officials may have kept the initial rate low to ease the burden for consumers. But people will begin to feel the impact on their wallets and pocketbooks more than they did during the first rounds of China tariffs, which were mostly focused on goods used earlier in the production cycle, not the direct-to-consumer goods now being targeted.

Not surprisingly, tension with China is on the rise. This week, China denied the request for a U.S. naval warship to dock in Hong Kong and President Trump accused China of meddling in the midterm election during a speech at the United Nations. While we are still a ways from an all-out trade war with China, it bears reminding that the country is the most populous on Earth and has the second-largest economy, so it deserves our attention as a large consumer (with the potential to become an even bigger consumer) of U.S. goods. So far, the market seems to be favoring the U.S., with the S&P 500 up 9.0% (not counting dividends) versus a Dow Jones index of local Chinese stocks down 13.5%.

Policymakers, Consumers Confident as Economy Continues to Expand                            

And why shouldn’t U.S. markets be up? Our economy continues to expand at a healthy clip—growing at a 4.2% annual pace between April and June. Corporate profits increased from $26.7 billion in the first quarter to $65.0 billion in the second quarter as, among other things, the impact of tax cuts kicked in. And corporate managers believe their companies are on solid enough ground to reward shareholders at unprecedented levels. During the second quarter, S&P 500 companies shelled out a record $111.6 billion in cash dividends. 

A further vote of confidence for the economy came Wednesday when the Federal Reserve, as expected, raised short-term interest rates another 0.25% to a 2.00%–2.25% range. Policymakers now officially say that monetary policy is neither tight nor loose—though, on a historical basis, we think most people would consider a fed funds rate of 2.25% to still be pretty darned favorable to borrowers. The Fed isn’t done with its interest-rate hikes, though, with a majority of the Fed governors anticipating another 0.25% rate hike in December, three more in 2019 and one in 2020. Of course, these predictions assume the economy remains on its current course. But just like any other economic or market prognosticator, the Fed doesn’t possess a crystal ball.

While the Fed is confident, how about the driver of the economy, the U.S. consumer? For all of the headlines and political discord, the average consumer is optimistic about the economy; the Conference Board’s measure of consumer confidence reached an 18-year high in September. Whether a tariff-related pinch rains on consumers’ currently sunny dispositions remains to be seen. 

Looking Ahead to Unemployment, Manufacturing and Service Sector Data

Job-related data, including September’s unemployment rate, headline next week’s economic reads. We’ll also be focusing on auto sales data and reports from the manufacturing and service sectors (and their respective job components) to gauge where we’ve been and where we’re headed.

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, September 28, 2018, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. 

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. 

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

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