Earnings Season Wrap: Mixed Bag Results Could Spook Investors

It’s earnings season and we are going to unpack initial third quarter results. The markets and economy went right along with the theme of Halloween and produced some spooky stats. An ease in geopolitical tensions and trade resolution could breathe life back into the markets. Will it happen?

Earnings Wrap

According to FactSet (as of 10/25/19), 40% of companies reported and 80% beat estimates. The trend isn’t all bad, but the problem is that analyst experts have really reduced estimates so low that everybody is beating them these days. Therefore, it’s kind of an engineered result. Further, blended earnings projections for this quarter point to a -3.7% decline for the quarter. Should this result come to fruition, it would mark the first time the S&P 500 Index has reported three straight quarters of year-over-year declines since 2015 and 2016. All the estimates have been pointing to negative territory, but so far, we haven’t hit any of the estimates. The economy seems to be holding up better than what the populous rhetoric has been indicating. As of October 31, there was a 1.9% GDP print for the third quarter. This beat the 1.6% GDP estimate and is a slight decline from Q2’s 2%, which doesn’t allude to a striking slowdown. Revenue growth for the S&P 500 for the third quarter is at 2.8%, which is not actually growth—it’s the lowest growth rate since Q2 of 2016. Coupling this statistic with the earnings growth rate of -3.7% for the third quarter gets a bit spooky and shows further earnings decline.

Brexit or Not to Brexit

Brexit is still looming large over England and the world. Boris Johnson, the Prime Minister, has definitely got his hands full in trying to pull off Brexit. Seems the news last week about Johnson’s approach with Parliament yielded a standoff of sorts with another extension placed on the Brexit decision. The UK has another election in December even though Johnson was just appointed. The confusion is very much affecting their economy and tends to have an overhang effect throughout the world. This could all end with a possible referendum vote against Brexit and it might all go away. Too early to tell if investors get spooked on the Brexit yay or nay referendum vote.

China Trade Deal

The trade deal with China still hangs in the balance. Yesterday, China set its mark for signing an interim trade deal – drop the tariffs (Bloomberg, 11/5/2019). In more detail, Beijing asked the Trump administration to eliminate the duty imposed in September on over $110 billion worth of goods, vow not to impose any new tariffs, and a rollback in the tariffs already forced. According to the Commerce Department data for September, U.S. imports for China fell 4.9% over the prior month, which is the lowest in more than three years. The duty placed on goods is the Trump administration’s way of trying make sure China upholds their part of the goals of the Trade Deal, 1) resume purchase of American farm goods and 2) to crack down on intellectual property theft. For now, the standoff remains steady in the Trade War.

Overnight Repo Infusion

Recently the Fed has been doing some overnight operations in the repo market by ramping up the amount of temporary liquidity injections it provides to the lending markets to a sum of $120 billion. This is up from what is normally around $75 billion a night. The Fed also announced that it will target $60 billion a month in bond purchases. This all in lieu of enacting another formal quantitative easing program that was present during the Financial Crisis. However, the spooky news here is that these numbers of liquidity infusion and bond buyback targets are reminiscent of the Financial Crisis.

One Possible Fix

For years, my opinion has remained that fiscal stimulus could be the fix we need. Massive government spending through fiscal stimulus is a long-term way to breathe life back into the economic system. Central bankers and Chairman Powell himself have said the effects of quantitative easing have run their course. Building infrastructure through these shovel-ready programs is a permanent form of capital that tends to add velocity to the economy. The main hold up among the Fed and central bankers is the notion that expansion in deficits through this medium is a bad thing, yet they’re willing to dump $120 billion into the overnight repo market. The scary thing is no one really seems to know what to do about the financial system being under such duress.

Hopefully the spookiest news went out with Halloween and we can look forward to the holidays with a newfound breath of crisp fresh air.

Important Information

Past performance does not guarantee future results. The views presented are those of Matt Schreiber or Don Schreiber, Jr., and should not be construed as investment advice. Matt Schreiber, Don Schreiber, Jr., or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

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