At its first policy meeting of 2019, the U.S. Federal Reserve changed direction. After four rate increases in 2018, Chair Jerome Powell announced interest rates were on hold. Last week, banks in the United Kingdom, Australia, and India followed suit by either reducing rates or cautioning rate reductions were likely, reported Sam Fleming and Jamie Smyth of Financial Times.
The dovish tone of central banks owes much to slowing global growth. January’s International Monetary Fund World Economic Outlook lowered global growth estimates for 2019 and 2020. Changing expectations were fueled both by factors that slowed momentum in the second half of 2018 and by issues that pose a potential risk to continued economic growth. These included:
- The negative effects of higher tariffs
- New auto emission standards in Germany
- A slowdown in domestic demand in Italy
- Economic contraction in Turkey
- High levels of public and private debt
- Escalating trade tensions
- A no-deal British exit from the European Union
- A severe slowdown in China
These issues have had limited effect on the U.S. economy; however, global risks are affecting the performance of some U.S. companies. Financial Times explained:
“The U.S. domestic economy has continued to put in a robust performance, with the number of new jobs in January coming in well ahead of Wall Street expectations and wage growth running comfortably above inflation. But corporate giants in the S&P 500 index, which generate over a third of their earnings overseas, are sounding the alarm about faltering overseas demand in markets including China, where the government has been battling against a slowdown. Smaller U.S. firms are feeling the global chill as well.”
Randall Forsyth at Barron’s reported major U.S. benchmarks finished last week higher, while the yield on 10-year U.S. Treasuries hit a 13-month low. Outside the United States, some global stock markets moved lower.
THIS WEEK IN THE MARKETS
U.S. stocks finished barely positive last week. The S&P 500 inched 0.1 percent higher on a relatively light week for news. The government shutdown has delayed a number of key statistics about the strength of the U.S. economy and given investors less data than expected to evaluate it. Earnings continued to outperform expectations. Last week’s earnings raised growth expectations to above 13 percent.
Trade negotiations between the United States and China remain a key focus. U.S. negotiators head to Beijing for the next round of negotiations this week. A possible meeting between President Donald Trump and President Xi Jinping prior to the negotiation deadline was ruled out by the United States. Markets dropped on Thursday in response to concerns trade negotiations weren’t going as well as anticipated.
Managing and meeting expectations is a key driver of investor reactions to news. Last week, the U.S.-China trade negotiations provided an example of how heightened expectations can put pressure on markets.
The negotiations are making progress, and U.S. representatives will travel to Beijing for the next round of talks. However, the United States backed away from a possible summit between President Trump and President Xi prior to the early March deadline set by the two countries. Reports indicated the negotiations haven’t reached the point of creating a written document of resolved and unresolved issues that is normal prior to the two heads meeting and ironing out the final agreement.
Investors had expected greater progress and continue to expect a deal, so the slight step backward moved markets in the latter part of the week because it failed to meet expectations.
Corporate earnings are another area where expectations matter. Corporations manage market expectations, so results typically beat them by a modest amount. This quarter, 71 percent of S&P 500 companies have beat expectations, which is about average.
The accompanying chart shows how slowing global growth and concerns about trade have pushed down expectations for global companies next year. S&P 500 companies deriving more than 50 percent of their revenue outside the United States are only expected to have earnings grow 1.9 percent on revenue growth of 3.1 percent. These dampened expectations may create an opportunity for global firms to outperform. The expectations for domestically focused companies are far higher and may be difficult to achieve.
February 11, 2019
KEY POINTS FOR THE WEEK
- U.S. corporate earnings continued to beat expectations by normal rates.
- U.S.-China trade negotiations made progress but not as much as expected.
- Optimism is highest for U.S.-focused companies.
WHAT ARE WE READING?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
46 indicators were measured to track the best and worse states to retire to. The factors center on affordability, health and quality of life. Florida not surprisingly is ranked #1 overall. The lowest ranked state is Kentucky. If you are considering moving during or prior to retirement, check out the link the see the full details.
Sybil Hicks wrote her own obituary before passing away on February 2. Her obituary has become quite popular on social media as her sense of humor truly showed. The most popular line includes a joke about her being cremated, “I finally have the smoking hot body I have always wanted.”
IRS VOLUNTARY ID THEFT PIN PROGRAM EXPANDING
The IRS is expanding to seven additional states its voluntary program for taxpayers who wish to obtain identity protection personal identification numbers (IP PINs) and are not currently victims of tax return identity theft. The pilot program originally involved Washington, D.C., Florida, and Georgia. IP PINs will now be available in seven more states: California, Delaware, Illinois, Maryland, Michigan, Nevada, and Rhode Island. Those states report the highest number of identity thefts to the Federal Trade Commission.
An IP PIN is a six-digit number assigned to eligible taxpayers to prevent their Social Security number (SSN) from being used on fraudulent federal income tax returns. It allows the IRS to verify taxpayers’ identities when they file their return. This prevents a criminal from filing a tax return using the IP PIN holder’s SSN.
The voluntary program permits taxpayers who last year filed a tax return from one of those states to obtain an IP PIN by using the IRS’s Get an IP PIN tool to authenticate their identities. To obtain an IP PIN, taxpayers must validate their identities through a two-factor authentication process called Secure Access. The pilot program will not have a manual option for taxpayers who fail to authenticate their identities.
Any taxpayer in the listed states may obtain an IP PIN. The IRS will continue to issue by mail IP PINs to taxpayers who are confirmed victims of tax-related identity theft. However, these taxpayers may also use the Get an IP PIN tool to obtain an IP PIN immediately.
Once the IRS determines its systems can handle the expansion of the program to the additional states, it hopes to be able to offer it to taxpayers in every state.
“Taking in the good, whenever and wherever we find it, gives us new eyes for seeing and living.”
~ Krista Tippett, American journalist
"The only way to discover the limits of the possible is to go beyond them into the impossible."
~ Arthur C. Clarke, Science Fiction Writer
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