Monday Musings: November 4, 2019

Nov 04, 2019

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Public Trust Credit Team
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Earnings better than expected, pushing off recession concerns

The bar for Q3 corporate earnings was low but proved better than expected with most companies finished reporting. Earnings are forecast to be down 2.6%, which is not ideal but was better than anticipated, and most analysts expect an acceleration of earnings growth in 2020. Additionally, revenues are expected to grow 3.6% this quarter, signaling top line growth is still solid. The stronger than expected earnings season coupled with strong economic data in October have allayed investors’ concerns surrounding a recession, leading to tightening spreads and a rally in equities. However, not all is rosy. Companies with significant foreign revenues have not held up as well, with companies that derive more than 50% of revenue excluding U.S. projected to see earnings declines of 7.4% this quarter and a 2.2% drop in revenues. Earnings may be holding up, but the backdrop of the strong dollar and trade uncertainty is still at the forefront of companies’ and investors’ minds.

The FOMC decided to cut the Federal Funds Target Rate by 25 basis points

Last week marked the third consecutive time the FOMC opted to slash the Federal Funds Target Rate by 25 basis points, now at a range of 1.50% – 1.75%. In the post-meeting press conference, Fed Chairman Jerome Powell signaled to the markets that they are likely done easing for the time being, citing “improvement in the balance of risks to the economic outlook,” related to optimism surrounding developments in the U.S./China trade negotiations. Despite the FOMC’s more hawkish tone following last week’s meeting, Powell insisted future rate hikes were still far from imminent barring a sustained uptick in inflation that remains muted.

Geopolitical noise continues

The U.S./China trade war may be abating, but Hong Kong is in recession and Brexit remains unresolved. With such a fluid news cycle stoked by social media, even one irrefutable data development feels like a victory. Resolution of the others is likely to be much farther off in the future. Regarding the actual development,  Hong Kong officially moved into recession in the third quarter on October 31, 219, unsurprising following nearly five months of protests. This is the first recession in a decade for the city, already negatively impacted by the U.S./China trade war. On the unresolved side, Commerce Secretary Wilbur Ross shared his optimism that the U.S./China trade could see some positive movement this month, and he also indicated that the U.S. is apparently reconsidering sanctions on European automobiles. On the topic of Europe, Brexit remains unresolved, and the U.K. is headed for an early Parliamentary general election that will ultimately decide the Brexit’s fate.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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