Ward Aguilar Financial Market Update June, 2017
Tell me about the Global Economy.
Things were looking up last quarter. Especially for emerging markets as global demand was picking up. However, there are some uncertainties on the horizon that could become a bigger concern for the global recovery.
(1) China. We have heard this story before, but after stellar economic data in the first quarter, we have received not so stellar numbers that could suggest, their recent hot streak could be cooling down. We will have to see how things progress.
(2) Brazil. Wait a minute; last quarter Brazil was stabilizing. That was true until another political crisis resurfaced in May following the release of secretly taped recordings involving President Michel Temer in a corruption scandal. Despite massive rallies led by the opposition, Temer has been able to retain the support of all the parties in the ruling coalition government, but his political future is in jeopardy, endangering his reform agenda and threating to derail Brazil’s economic recovery. This does not help contagion risk in the region as both Venezuela and Ecuador continue to struggle.
Overall, the global economic outlook for the rest of 2017 remains mostly positive. The economic recovery has been supported from an uptick in global demand and improving labor markets, particularly in the developed world. However, sluggish wage growth and rising inflation in several of the developed countries such as Japan, U.K and the U.S continue to weigh on the recovery.
What’s going on with the U.S Economy?
The good news is, the economy is essentially at full employment, and for the time being, we see subdued contagion risk from other major economies such as Europe and China.
The Federal Reserve will continue to take measures to tighten the monetary policies and shrink their $4.5 Trillion balance sheets. In addition, all eyes will be focused on the fed this month to see if they raise the fed funds rate another quarter percent. We could possibly see two more rate hikes this year. However, if inflation remains soft one of those rate hikes could be postponed.
Lastly, the continued political noise could question Washington’s ability to actually act on or approve growth-inducing policies by this year.
How do you feel about the Stock Market?
Earnings and sales for companies have been stellar recently. In the first quarter of 2017, 75% of S&P 500 companies have beaten the means earnings estimate and 64% of S&P 500 companies have beaten the mean sales estimate.(1) Analyst have lowered second quarter S&P 500 earnings estimate by 1.7% which marks the smallest decline since Q2 of 2014.(1) Overall we are still positive on equities going into the third quarter. We are more cautious with bonds with two more possible interest rate hikes this year. But longer term rates will still probably be less affected then the short term rates.
(1) Factset Q1 Earnings Report