Market Insights

Quick confession: I stole the title from an article I saw yesterday. I didn’t necessarily do so because I thought it was a great title; rather, it made me laugh and think, “Here we go again with these hyperbolic headlines.” This is probably the 5th or 6th “most important week of the year” so far, if anyone is keeping track. With that said, after the mild sarcasm, this could, in fact, be a very important week for the direction of the markets.

Before smartphones and tablets were invented, what some refer to as the “good old days,” summer activities involved a little more adventure. One popular family activity was going to the local carnival. While these still exist, their popularity has waned over the past decade. One of the top attractions was the Fun House. The Fun House was usually a large building or trailer with a collection of separate rooms that each held a unique feature. Some effects were more intense than others but one constant was the Hall of Mirrors. The Hall was a room or actual hallway that contained a series of strangely shaped mirrors that would distort ones image in a variety of interesting ways. There was always something interesting about seeing yourself appear 10 ft tall or looking like a giant “S”. Now imagine the bond market is walking through the Hall of Mirrors.

If there is anything that financial media is certainly guilty of, it’s producing too many articles that portend “big things” are just about to happen. It’s usually conveyed right in the title with a sense of either impending doom or riches. Of course, the goal of most articles, whether financial or not, is to get as many people as possible to click on the article. Creating a shocking or intriguing title is certainly a good way to do that. Most of the extreme investment pieces don’t stop at just the title. They meticulously lay out how and why something crazy is going to happen and many will even take a stab at predicting “when” as well. It usually isn’t enough to just lay out the possibility of an inflection point in the market. To really sell it, the author must include the details, because why would someone just imply there will be a market crash when they can predict the market will crash by (insert extreme, arbitrary number and date).

You are heading down the road, without a care, and then you see a sign that reads, “Road Closed due to Political Risk”. Welcome to the markets in 2019.

Some of you may know the popular television show “Deal or No Deal”. The premise of the show is fairly simple, but the drama of the decision makes it exciting. The player chooses one of 26 different briefcases, each containing a marker for various amounts ranging from 1 cent to $1 million. The player then eliminates the remaining cases one by one, revealing the amount inside as the decisions are made. After several possibilities are removed, the “banker” tempts the contestant with an offer to stop playing in exchange for a certain amount. The contestant must choose between accepting the deal or continuing to open cases in hopes of getting a better offer and possibly winning a million dollars. Of course, there is always the chance of going home with 1 cent. The most dramatic part of the show happens when a contestant emphatically announces, NO DEAL! while the audience cheers. Last week, the US and China both declared NO DEAL! Needless to say, the world audience was not cheering.

So far, earnings are showing the first quarterly declines in years while the markets have quietly broken out to new all-time highs. How can bad news bring good markets? For one, volatility has settled down to levels last seen during the summer of 2018 and secondly, the news has not been filled with market-moving headlines. Many investors welcome this as a time to relax while some pundits preach “the end is nigh”. Regardless of one’s view of what is likely to happen next, corporate earnings are the next market moving catalyst on the radar. So far, earnings season has been right in line with what most analysts were expecting. As of April 26th, 46% of companies in the S&P 500 have reported for the current quarter. Of those, 77% have reported a positive earnings surprise while 59% have reported a positive revenue surprise. The blended earnings growth rate is a -2.3% which, if it remains, would mark the first year-over-year decline since Q2 2016. On an absolute basis, these numbers aren’t the type one would expect to drive markets to new all-time highs, but on a relative basis they are better than lowered expectations.