Looking Back at July
The second quarter 2018 Real GDP (Gross Domestic Product) was first reported at a 4.1% annual growth rate. Many analysts are projecting that the US will end up the year with 3% growth.
While the economy is very strong and the market is still trending upward, the ‘earnings season’ beginning on July 1st has been marked by companies reporting very good earnings, but with lower guidance going forward.
Facebook was an example. The stock dropped 20% the last week in July. Netflix had the same type of report and was also down. Trade tensions, especially with China, could be influencing future guidance. It is certainly on the minds of many CEOs.
According to BIG (Bespoke Investment Group), during first quarter earnings season, mentions of the word “tariff” were fairly uncommon, with less than 20% of companies using the word in their calls. In the second quarter to-date, that’s doubled to about 40% of companies have mentioned tariffs. (Sugar Magnolia: Is the Economy’s/Earnings’ Surge a Sugar High or Sustainable? Liz Ann Sonders, July 30, 2018)
The Federal Reserve did raise interest rates by 0.25% in July. The plan is to raise rate again in September and December. The goal is to have normal rates somewhere in the 3% range to combat inflation.
Looking Ahead to August
So far, 86% of companies are reporting earnings better than expectations. Unfortunately, while some companies beat expectations, those companies that miss are being punished with lower stock prices. And, that does prevent the market from really going forward.
While the trade disputes continue to make the news, we do anticipate that they will be settled fairly quickly. Other challenges to companies this year includes increased costs due to higher wages, higher energy prices and potentially higher costs due to possible tariffs.
“The improvement outside of global manufacturing is encouraging. However, global stock markets could focus again on risks in August… August has been a month known for volatility and has often been a month of losses for global stocks.” (Schwab Market Perspective: Balancing Act, Liz Ann Sonders, August 3, 2018)
Only time will tell this year, but we will be watching very closely.
We are keeping an eye on events that may influence the market. However, it is still summer and not as many investors are actively trading right now – which does cause increased volatility.
As investors, not traders, we need to look past the summer and into the fall. We still believe that our allocations should tilt away from bonds. We will continue to closely monitor economic developments as well, as global events that affect the market.
If you have any questions, please contact us.