Let’s begin this edition of Market Update with a quick review:

  • The ISM (Institute of Supply Managers) and PMI (Producer Manufacturing Index) reports for the month ending March were again strong. They measure everything from factory orders to inventories, etc. This illustrates the continuance of a fundamentally solid U.S. economy.
  • The Federal Reserve has essentially taken its foot off the gas of raising short–term interest rates indicating zero to possibly just one more hike for the remainder of 2019.
  • China’s economy just came off its second quarter in a row of economic growth; a positive sign as that country seems to be turning the corner, headed back on the path of growth.
  • On a related note, as of this writing it looks very likely the U.S and China are near a trade deal which should put an end to this year long trade dispute between the 2 largest economies.

Against this positive economic backdrop, I think it’d be wise for everyone to take a breath and apply some perspective on the relationship between corporate earnings and stock prices. Q2 earnings begin coming out this week and remember, corporate earnings misses typically cause sell offs on the stock market and I suspect we’re going see some negative earnings and revenue reports from a variety of businesses similar to what was experienced in the second quarter of 2016.

Employment in the U.S. has been at capacity for some time now. So it should come as no surprise that wages have risen accordingly. In fact they’re up 3% through the end of March according to the Bureau of Labor and Statistics. Incidentally, have you noticed what you’re paying for gas at the pump? According to Zack’s, energy prices have climbed 32% from January 1st through March 31st. Do you think if you’re paying more at the pump to fill up your car it’s reasonable to assume industry is paying more to fuel its factories? Folks, increasing wages and rising energy costs are drags on profits and earnings. So be prepared for some misses this earnings season.

As for a looming U.S. recession just around the corner, there seems to be little to no consensus of that scenario playing out in the near term according to the money managers and economists I read. That said, U.S debt has reached record levels. The amount of corporate and government debt at some point is bound to impact economic growth thus likely to cause pain in the stock market. But remember this. Until the fundamentals make a decided shift in the opposite direction, don’t get spooked by a choppy earnings season.

In closing I suggest it’s reasonable to expect some selling on the stock market in coming weeks that, in my opinion, will be driven in large part by some negative earnings reports not because a recession is looming. Stocks prices may reflect some near-term sentiment but that doesn’t mean this bull has run out steam.

‘til next time…………………….stay nimble, be tactical and know what you own.

These are the thoughts of Randy L. Miles, Sr and not necessarily of Cambridge Investment Research. These comments should not be deemed as an offer to buy or sell any securities nor construed as investment advice.