The Worst Week

Published On: August 5, 2019

Written by: Ben Atwater and Matt Malick

Last week was the worst week of 2019 for U.S. and global stocks.  Based on the start to this week, we may well be working toward another rough week.

With unrelenting pressure from markets and the Trump Administration, the Fed lowered rates last Wednesday by 25 basis points.  However, the markets and President Trump found the cut unsatisfactory.  In the wake of the interest rate cut, Fed Chairman Jerome Powell conducted a press conference during which the market continued to wane the longer he talked.

And then came Thursday, when President Trump tweeted his announcement of additional tariffs on $300 billion of Chinese imports to the United States.  Tariffs will soon apply to virtually all Chinese imports to the U.S.  Stocks continued cratering to close out the week.

This morning, in response to the new tariffs, China has pledged to stop imports of U.S. agricultural products and, more meaningfully, devalue their currency, the Yuan.  These retaliatory measures are clearly meant to infuriate President Trump as these are the two areas he mainly references when speaking about China.

On top of these macro events, we are also in the thick of corporate earnings with companies reporting their June 30^th results. 

Given all the market noise, it’s easy to see how earnings results have taken a backseat to global headlines.  However, as investors in individual companies, it’s always vital to closely examine corporate results.

Even after last week’s drop, the S&P 500 has moved considerably higher year-to-date, however, earnings for S&P 500 companies have not increased in 2019.  At 16.7 times forecast earnings, the index is trading at an 11% premium to its 10-year average. 

For now, analysts believe the S&P will see 6% earnings growth in the fourth quarter and then 10% for the whole year of 2020, data compiled by Bloomberg show.  However, so far, more than half of S&P companies giving third quarter guidance have guided to the downside of expectations.

Clearly markets face macro and micro challenges as the rest of 2019 unfolds.  It may be that the best of the year is behind us, but it’s impossible to know.  Markets are, as always, unpredictable. 

Our investment process is based on fundamental analysis including valuation, cash flow, dividend growth, share count reduction, etc.  When markets become unstable, it’s more important than ever to follow an investment process and an investment discipline.