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IWM Commentary April 2019

April Commentary

Events of April confirmed reports of the U.S. economy’s demise were at best premature. Wage growth remained solid; consumer sentiment percolated at or near the post- recession peak; stock markets were healthy and the employment rate fell to its lowest in 50 years. The Federal Reserve Bank all but withdrew its plans for gradual interest rates hikes/reductions in favor of a wait-and-see approach which cheered new house sales.

Storm clouds lingered however, although mostly overseas. The economies of Europe continue to lag in part due to Brexit worries, political uncertainty and the uneasy feeling that U.S.-led trade spats can go either way.


Bond yields tumbled – at one point as much as 2.37% on the 10-Year U.S. Treasury note – as the Fed’s reversal on interest rates clarified. The 10-year yield finished below the three- month bill four straight days during the month, an inversion sometimes regarded as an indicator of recession in the next 12-24 months. “The message from the collapse in bond yields is too loud to ignore,” noted ZeroHedge, “…crushing the spread between 3-month and 10-year Treasury rates to just 2.4bps – a smidge away from flashing a big red recession warning.”

On a more positive note, the usually cautious Morgan Stanley declared “numerous positive macro catalysts are now behind us, including 1) dovish Fed pivot; 2) China stimulus showing signs of working; 3) a U.S.-China Trade deal; and 4) growing hope for a resolution of Brexit.”

361 Capital blogged that a thicket of uninspiring earnings results is souring the mood on Wall Street, according to the firm’s Mood Monitor, a model that gauges the investment climate based on earnings trends, sentiment and correlations. In the fourth-quarter earnings season, the Monitor concluded, 49% of Russell 1000 index companies delivered earnings that represented a 6% drop from the previous quarter and an 11% drop from the

third quarter. In addition, 15% of companies reported earnings that were at least a standard deviation below consensus expectations, a rate that has now crept above the long-term average of 13%.

In September 2018, FactSet reported the total percentage of upward revisions fell below 50% for the first time in 11 months, while negative revisions have outpaced positive ones in every month since then. In March, only 45% of analysts’ earnings estimates were upward revisions.

Thus far, 78% of the companies in the S&P 500 have reported results for the first quarter 2019. According to FactSet, “the percentage of companies reporting actual EPS above estimates (76%) is above the five-year average. In aggregate, companies are reporting earnings that are 5.6% above the estimates, which is also above the five-year average.” On the revenue front, FactSet notes that “the percentage of companies (60%) reporting actual sales above estimates is slightly above the five-year average. In aggregate, companies are reporting sales that are 0.3% above estimates, which is below the five-year average.”

Looking at future quarters, analysts expect a slight decline in earnings in the second quarter, low single-digit earnings growth in the third quarter, and mid to high single-digit earnings growth in the fourth quarter. This equates to about 3.4% earnings growth for calendar year 2019. Summing up earnings thus far, BlackRock notes “U.S. earnings growth has slowed markedly from 2018, but a surprisingly resilient first quarter supports our still-positive view on U.S. equities.”

In what Reuters call “perhaps his most unorthodox statement yet” on monetary policy, President Trump called for the Fed to renew “quantitative easing” and pump trillions of dollars into the economy. From Integrated Wealth Management’s’s perspective, the Fed most likely made a mistake by allowing short term market or other pressures to force their abandonment of a righteous mission to normalize interest rates. The last thing this economy needs is more stimulation. Quite the contrary, with potentially another full Fed cycle of abnormally low interest rates now ahead of us, the risks tilt squarely towards further distortion of capital allocation, generational dis-saving to meet income needs in retirement, continued episodic spikes in market volatility, and steady nourishment of asset bubbles in their formative years.

US Economy

Total nonfarm payroll employment increased by 263,000 in April, and the unemployment rate declined to 3.6 percent, the U.S. Bureau of Labor Statistics reported.

Notable job gains occurred in professional and business services, construction, health care, and social assistance. At the same time, wage growth remained solidly above the 3% mark in 2019. Low-wage and middle-wage jobs are seeing the strongest wage growth, according to Morgan Stanley. It is highly probable that we are starting to see a surge in temporary hires for the U.S. Census Bureau’s 2020 count, which will lift payrolls over the next couple of months. The bureau received approximately 170,000 applications for positions in March. Further, average hourly earnings increased 0.2%, resulting in a 3.2% increase year-over year, which is unchanged from the prior month. The average workweek declined from 34.5 to 34.4 hours, which modestly shrinks weekly take-home pay.

The April 2019 University of Michigan Survey of Consumers Survey indicated that consumer sentiment fell on a month-by-month and year-on-year basis but still remained at elevated levels. As noted by the Surveys of Consumers chief economist, Richard Curtin “The Index of Consumer Sentiment has moved sideways, recording only small monthly variations since Trump first entered office… When asked about their financial prospects for the year ahead, 44% of consumers anticipated improvements compared with just 8% who expected worsening finances.”

Meanwhile, the Internal Revenue Service reported that more people received a tax refund this fiscal year but of a diminished size. The Tax Policy Center estimates that the average US tax payer paid about $1,260 less in taxes for tax year 2018 vs. tax year 2017.

Low bond yields were a boom for the housing market, as the Commerce Department reported new home sales soared 4.5% higher month-over-month (“MoM”) and February was revised stronger from +4.9% MoM to +5.9% MoM. It was the third straight month of rising new home sales. Existing home sales told a different story, however, as sales continued to lag in March, by 4.9%, according to the National Association of Realtors. Sales decreased for a fourth time in five months despite lower mortgage rates, sustained wage gains, and slower home price appreciation. February’s 11.8% spike was revised slightly lower to 11.2% MoM.

On the GDP front, the advance estimate of first quarter GDP came in at an annual rate of 3.2%, according to the Bureau of Economic Analysis (BEA). This far exceeded expectations of 2.0% growth; however, the underlying internals of the 3.2% print were noticeably soft, as noted by analysts. Net exports comprised a full point of GDP growth, which likely won’t continue in the backdrop of softening global trade. In addition, the BEA noted that the strong GDP print was influenced in part by “an upturn in state and local government spending,” which may or may not persist in subsequent quarters.

Personal income rose just 0.1% in March, but the wages and salaries component increased 0.4%, which reflects continued healthy gains in income. Personal spending rose a whopping 0.9%, led by durable goods, which was a major improvement from the weak readings we saw in January and February. The bottom line is that we continue to see a steady but slow rate of real growth in consumer spending.

This is keeping a lid on the Fed’s preferred rate of inflation. The Personal Consumption Expenditures Price Index (PCE) rose 0.2% in March, while the core rate (excludes food and energy), the Fed’s preferred inflation gauge, was unchanged. Core PCE is now up just 1.6% year-over-year, decelerating over the past four months from the Fed’s 2% target.

Manufacturing activity continues to decelerate in 2019, as IHS Markit’s manufacturing index edged slightly higher to 52.6 in April from the March reading of 52.4, but production and employment growth both remain at two-year lows. There was an improvement in new orders, yet “the survey remains consistent with manufacturing activity acting as a drag on the economy at the start of the second quarter,” according to Chris Williamson, Chief Business Economist at IHS Markit.

The Institute for Supply Management’s manufacturing index fell to 52.8 in April from 55.3 in March, which is the weakest reading since October 2016. All of the sub-indices declined, and export orders contracted for the first time since February 2016.


Confrontations over trade policy are compromising world growth, according to international agencies. The International Monetary Fund warned that the escalation of U.S.-China trade tensions was one factor that had contributed to a “significantly weakened global expansion, especially in the second half of 2018.” For its part, the Organization for Economic Cooperation and Development declared tariffs imposed by the U.S. and China last year, had slowed economic growth in the world’s two largest economies.

European economies managed only modest growth in the first quarter of the year. Eurostat, the statistical office of the European Union, reported that GDP rose by 0.4% in the euro area compared with the previous quarter, while in the fourth quarter of 2018, growth rose by 0.2%.

The outlook for Germany, the EU’s economy engine, was particularly grim, as the ifo Business Climate Index fell from 99.7 points in March to 99.2 points in April. “Companies are less satisfied with their current business situation,” according to ifo. “March’s gentle optimism regarding the coming months has evaporated.”

A contrarian voice emerged from Blackrock, which forecast recovery in Europe if it can avoid a trade skirmish with the U.S. Though market fears over trade tensions have calmed over recent months in some quarters as the Americans and China inch toward a trade deal, the investment manager worries the White House will swing the same cudgel that appears to be working against Beijing – namely, tariffs – in negotiations with the European Union.

European leaders have made clear that they would retaliate swiftly, Blackrock warns, and neither side is likely to back down. While the economic fallout of such a confrontation would be manageable, “it could have outsized market impacts.”

Should cooler heads prevail, however, Blackrock anticipates a European rebound in the second half as financial conditions have eased significantly since the start of the year and China’s stimulus efforts could boost capital spending – a potential boon for Europe’s manufacturers.

China’s first quarter GDP rose 6.4% YoY, the same as that of the fourth quarter last year, 0.4% lower than that of the same period last year and 0.2% lower than that of 2018. The country’s Official PMI Manufacturing Purchasing Managers Index for April, released by the China Federation of Logistics and Purchasing and the National Bureau of Statistics’ Service Industry Research Center, was 50.1%, down 0.4 percentage points from the previous month.

At the same time, China’s Purchasing Managers’ Index posted down from 50.8 in March to 50.2 in April, the second successive monthly improvement in business after several subdued reports.

Needless to say, with Europe struggling, it is incumbent on China to propel its economy as a reserve engine of growth. In the meantime, however, we believe the U.S. economy still has room to run on its own.


David Young, CFA®
Chief Investment Officer, IWM, LLC

Brent Pine, CFP®, CPA
President & CEO, IWM, LLC

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*David Young is not affiliated with Geneos Wealth Management, Inc.
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The purpose of this communication is to provide general information, opinion, and outlook. All references to potential future developments or outcomes are strictly the views and opinions of Integrated Wealth Management, and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in global economies and investment markets.

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