Broker Check

Taking a Pause From Politics

| October 28, 2019
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The lack of political and trade related influence during the week allowed market participants to focus on the current earnings season, along with macroeconomic data releases, as the main factors for market activity. Although such a scenario should always be the norm, it has now become a unique exception to witness equity markets react for the sole purpose of positive, or weak, data points. Stated differently, the notion of objectivity has taken a back seat to subjective guidance statements, both from the Federal Reserve and from the White House. We would argue that this is not sustainable in the long run given that there needs to be a quantifiable catalyst for equity markets to continue in their current path, as has been the case historically. The hopes of a trade solution with China cannot indefinitely sway market activity, despite what may seem like a never-ending battle, and the notion of economic fundamentals will once again take hold. It remains difficult to gauge such a shift in the current environment which means proper risk management across equity market participation should be top of mind. 

As of Friday, 201 companies within the Standard & Poor’s (S&P) 500 Index had reported quarterly earnings with a weighted earnings upside surprise of 4.39%. Absolute growth on earnings remained flat. This simply means that earnings have been slightly better than anticipated this season, a notion that speaks volumes on the resilience of consumers and their continued fiscal health. Domestic gross domestic product (GDP) growth relies on consumers for up to 70% of growth attribution and it may be likely that such strength has not yet faltered. In our view, the strength of consumer balance sheets provides an objective argument for the potential of sustained earnings over the next 12 months along with the possibility of a muted business cycle shift. We have extensively discussed this point across numerous commentaries in the past and it continues to be one of our most closely watched indicators, among others.

Global equity markets gained impressive upside during the week with the FTSE All World Equity Index closing higher by 1.23%, matching the return profile of the domestic S&P 500. We were highly encouraged to see with S&P 600 Index (small capitalization equities in the U.S.) gain nearly 1.90% for the week. The index has lagged over the past few months and its upside during the week was a welcomed sign tied to investor sentiment. One important breakdown for last week is tied to sector performance given the highly unexpected weakness of the S&P Consumer Discretionary sector, which closed the week lower by -0.80%. It just so happened that the top five companies within the sector, which make up an eye-opening 40% of the entire sector, all suffered downside. Not only does this point to the risks of concentrated sector investing but it also speaks on the risks of highly concentrated individual names. At the top of that list last week was the weakness in Amazon’s price, which makes up a whopping 22% of the consumer discretionary sector. 

On the economic data front, we learned during the week that manufacturing figures, as reported by the Federal Reserve Bank of Richmond, resulted in better than expected growth. We have objectively argued in the recent past that the weakness in the manufacturing sector does not appear to be systemic in nature. Rather, it appears to be more cautious stemming from trade uncertainty. We’re keeping a close eye on all marginal developments as a gauge of risk sentiment across global equities. 

Edison Byzyka, CFA

Chief Investment Officer

Chair of the Investment Policy Committee


Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.

All return data sourced from Bloomberg.  All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations. 

Small Business Optimism sourced through NFIB.  Consumer sentiment sourced through the University of Michigan. 

Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. 

The FTSE All-World Index is a market-capitalization weighted index representing the performance of the large and mid-cap stocks from the FTSE Global Equity Index Series and covers 90-95% of the investable market capitalization. The index covers Developed and Emerging markets and is suitable as the basis for investment products, such as funds, derivatives and exchange-traded funds.

The S&P Small Cap 600® seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.


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