Third quarter earnings season kicked off this week, with all eyes on the banks, as most major diversified financial companies provided results and forward guidance for the coming year. The data thus far has been mixed, with some standouts showing strength in top and bottom line growth, while others struggled with write downs on bad bets and lower trading revenue. The next several weeks will unveil the health of corporate America, and whether the consumer is continuing to support the expansion or if companies are doubting where future growth will come from. We will be tuned in and update our outlook accordingly.
On the trade front this week, mixed signals emerged from the supposed Phase one deal outlined by the White House. China seemingly appeared to back away from any substantive progress over the weekend, though relations seem warmer than before the talks began. Up for grabs are generous agricultural purchases, though little in the way of significant reforms on intellectual property or market access, where the impetus for change remains. Also on the international front, Brexit appeared to be making some progress, with negotiators from the EU and Britain seemingly making headway with negotiations, until those talks broke down yet again, with the deadline looming in the next several weeks.
Adding to concerns, US retail sales posted a surprise drop in September, underpinning more calls for a Fed rate cut this month. Despite much talk about the resiliency of the US consumer, data there is beginning to weakening. Digging deeper into the data, there remains a significant disparity between lower and middle income American’s ability to increasingly spend as opposed to the upper-middle and wealthy consumers, who have seen record gains since the financial crisis. As wealthier American’s propensity to increase their spending is lower due to a higher base line (how many boats can one family buy?) the burden for consumer spending to increase and boost the economy falls on those groups that have realized the slowest growth in income. This conundrum also likely explains why asset prices have continued to rise for much of the past decade, though economic growth, wages, and inflation have stagnated. The result has been further accumulation of assets for those who spend the least, namely the wealthy, while the majority of Americans have missed out on the gains and therefore the ability to spend. If households cannot continue to modestly expand their consumption, the economy will certainly slow from here.
At this time, we are holding tight on any adjustments to the current allocations. We believe this quarters’ earnings figures and guidance looking forward will be key for direction on equity prices, as extreme levels of doubt persist over the global economy. The Fed will dictate much of the direction from here as well, and we believe an October cut is likely as additional “insurance” for the US to ward off any potential recession fears. We remain defensively positioned, however, as the risks to the downside far outweigh the potential for small upside gains from here. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.