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The Northern Star 10/01/18 Special Update: Quarterly Report

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Message from Jon


If I was a betting man...

The market is certainly making fools out of experts and winners out of fools right now! The markets are rallying and roaring, giving investors a warm and sometimes a wow feeling. If I was a betting man, earlier in the year I would have bet on the markets trading sideways and getting weaker by the month by now. 1

That was before the Tax Reform and its impact on corporations and their ability to adjust their accounting accordingly. 2 We are then pushed to concern with the tactics involved in negotiating better trade agreements with Tariffs and New Deals on NAFTA.3  This has been anything but smooth, but it has certainly been seen by many as beneficial to the future of corporate America and the US economy. 

The presidency thus far has been quite interesting, and one could even say tumultuous, but it's hard to say that it hasn't been beneficial from the investing point of view. Not to say that the presidency's role is to influence the markets at all-I am saying that this presidency has been able to accomplish some key agreements that have thus far benefited investors.

According to Eric Kuby, CIO of North Star Investment Management, "the S&P 500 had the best quarter since 2013 with a 7.2% return!"4  Again, If I am a betting man, I am confident enough to believe that the Tariff talks and actions thus far will ultimately end up in the favor of the US and thus, benefiting US companies.

Do I think that we are still headed toward a correction in 2019? I believe that we are more likely to see this market stay around longer than expected but then dive lower and steeper than expected in my opinion. So at this point, we stay the course, remaining diligently searching for better investments for clients.

Till we speak again, enjoy the onset of Oct! 

Jon

Sources:

1: https://www.cnbc.com/2017/11/15/market-will-see-headwinds-in-2018-says-charles-schwab-strategist.html 

2: https://www.ft.com/content/01a3d5b8-4417-11e8-803a-295c97e6fd0b

3: https://www.reuters.com/article/us-trade-nafta/in-trump-win-canada-us-deal-saves-nafta-as-trilateral-pact-idUSKCN1MA0UJ

4: http://nsinvest.com/headwinds/

Special Update: Quarterly Report

WEEKLY UPDATE - OCTOBER 1, 2018

Friday, September 28, was the last trading day in 2018's 3rd quarter, and the S&P 500 posted its strongest quarterly return in nearly 5 years.[1] The Dow also showed impressive returns by beating expectations for the quarter, while the NASDAQ notched record highs against 2017 numbers. For the quarter, the S&P jumped 7.2%, the Dow increased 9.3%, and the NASDAQ moved up 7.1%.[2]

Weekly numbers, however, revealed mixed performances: the S&P 500 slipped 0.54%, the Dow fell 1.07%, and the NASDAQ gained 0.74%.[3] Internationally, the MSCI EAFE dropped 1.07%.[4] As we learn more about the 3rd­ quarter, some details from last week offer perspectives on where we stand today.

What We Learned About the 3rd Quarter Last Week

1. Consumer outlook suggests positive trends continue.A few early reports have given us a sense of positive trends in consumer activity during the 3rd quarter:  
  • Consumer sentiment rose in September to finish at healthy levels that beat August's performance, marking the 3rd time the index has moved above 100.[5] With personal income optimism hitting a 14-year high, the positive trend suggests that nearly every population group now benefits from the 3rd quarter expansion.[6]
     
  • Consumer confidence neared its highest reading since 2000, beating analyst predictions and inching closer to the dotcom's record highs.[7]This rise came after a surge in August, prompting predictions that spending strength will carry us through 2018.[8] From sentiment boosts in the stock market to positive home-buying trends, consumers remain optimistic.[9]
These numbers suggest healthy consumer outlooks, positive economic attitudes, and possible trends in increased spending.[10]

2. Companies anticipate softer profits.Although corporate earnings in the 1st and 2nd quarters rose roughly 25%, 3rd quarter corporate earnings may miss that mark. Of the 98 companies in the S&P 500 that have released earnings outlooks, 74 predicted that earnings will fall below expectations from Wall Street. This ratio is the worst since the earnings recession of 1st quarter 2016.[11] Even with the softer outlook, analysts still expect the S&P 500 to post numbers that indicate a growing economy.[12]

3. Gross Domestic Product (GDP) growth shows signs of slowing.Core capital goods (not including aircrafts) dropped 0.5% in August after July's negative performance - as demand for computers, electronic products, and motor vehicles waned. The shift prompted some analysts to revise their 3rd­ quarter GDP predictions downward. Yet, with a bump in wholesale and retail inventories, overall 3rd quarter growth remains in positive territory.[13] The Atlanta Federal Reserve now predicts growth to be 3.8%, revised from an earlier prediction of 4.4%.[14]

4. Tariffs start to drag 3rd quarter growth estimates.The early effects of tariffs seem to have surfaced, as exports are now trending negatively. On September 27, the International Trade in Goods report posted numbers that may predict slower 3rd quarter growth:  
  • Exports dropped 1.6% in August, continuing July's downward trend.
  • Imports rose 0.7% yet have so far posted a trade negative for the quarter.
  • The trade deficit hit $75.8 billion, yet analysts believe this gap will narrow slightly once more 3rd quarter data emerges.[15]
If this trend involving exports and imports continues, the U.S. dollar may take a hit.[16] Meanwhile, on September 24, President Trump added tariffs on $200 billion worth of Chinese goods, and China responded with its own tariffs on $60 billion of U.S. products. Though negotiations between the two countries have stalled, we will monitor the situation.[17] 

What's Ahead

The Federal Reserve remained optimistic last week about the economy, raising the interest rate from 2% to 2.25%. The 3rd increase this year is no surprise but does suggest confidence in a growing economy and low unemployment numbers, and that a 4th quarter hike is highly probable.[18] With new data coming in, we'll deepen our understanding of the economy's performance in the 3rd quarter. If you have questions about how this may affect you or your financial life, contact us today; we're ready and happy to help.  

ECONOMIC CALENDAR
Monday: PMI Manufacturing Index, Construction Spending
Wednesday: PMI Services Index
Thursday: Jobless Claims, Factory Orders
Friday: Employment Situation, International Trade Gray

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Sources:

[1] www.marketwatch.com/story/stock-futures-fall-dow-set-for-worst-week-in-three-months-2018-09-28

[2] www.cnbc.com/2018/09/28/us-markets-political-turmoil-and-data-take-center-stage.html

[3]  http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-UShttp://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI®ion=usa&culture=en-UShttp://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

[4] https://www.msci.com/end-of-day-data-search

[5] www.marketwatch.com/story/us-consumer-sentiment-cools-a-bit-in-late-september-2018-09-28

[6] mam.econoday.com/byshoweventfull.asp?fid=485859&cust=mam&year=2018&lid=0&prev=/byweek.asp#top

[7] mam.econoday.com/byshoweventfull.asp?fid=485922&cust=mam&year=2018&lid=0&prev=/byweek.asp#top

[8] www.reuters.com/article/us-usa-economy/u-s-consumer-confidence-races-to-near-18-year-high-idUSKCN1LD201

[9] mam.econoday.com/byshoweventfull.asp?fid=485922&cust=mam&year=2018&lid=0&prev=/byweek.asp#top

[10] mam.econoday.com/byshoweventfull.asp?fid=485922&cust=mam&wiconly=1&lid=0#top

[11] www.cnbc.com/2018/09/26/companies-are-warning-about-declining-profits-and-that-could-be-the-catalyst-for-a-pullback.html 

[12] www.marketwatch.com/story/this-trend-threatens-one-of-the-stock-markets-strongest-pillars-2018-09-26

[13] www.reuters.com/article/us-usa-economy/us-capital-goods-orders-trade-data-temper-third-quarter-growth-forecasts-idUSKCN1M71PK 

 [14] money.cnn.com/2018/09/28/investing/stocks-markets-third-quarter/index.html 

 [15] mam.econoday.com/byshoweventfull.asp?fid=486154&cust=mam&year=2018&lid=0&prev=/byweek.asp#top

[16] mam.econoday.com/byshoweventfull.asp?fid=486154&cust=mam&wiconly=1&lid=0#top

[17] www.bloomberg.com/news/articles/2018-09-24/trump-imposes-next-batch-of-china-tariffs-as-trade-war-escalates

[18] www.usatoday.com/story/money/2018/09/26/fed-raises-rate/1426946002/