A QUARTER OF A PERCENT ISN’T GOOD ENOUGH?: Somehow, investors got it in their head that the U.S. Federal Reserve is going to lower interest rates by one half of one percent during its July meeting. As a result, when the Fed signaled this week that a quarter of a percent rate cut was more likely, it caused markets to move negative on Friday. This resulted in a negative week, but U.S. stocks are still up more than 1% for July after a big rise in June.
EARNINGS TRENDS: Only 13% of the S&P 500 companies have reported their second quarter earnings. Estimates for where earnings will land for the second quarter have been decreasing. Overall expectations in January were for 6.5% growth in the second quarter. In April, those expectations had decreased to 2.9%. On July 1, expectations reduced even further to 0.3%. A continuing pattern during this recovery has been low expectations for earnings, and actual earnings beating the low expectations. Expect that to continue. It is very early, but of the 13% of S&P 500 companies that have reported, 80% have beaten expectations.
LABOR TRENDS: Job growth has moderated versus a year ago, but hiring is still respectable. The average monthly increase in employment in the U.S. is 172,000 in the first half of 2019. It was 235,000 a year ago.
CHINA’S TROUBLED LONG-TERM PROGNOSIS: China’s state-driven economy may be slowing sooner and faster than its government would like. A recession may not be imminent, but the long-run implications are serious. The economy’s growth slowed to 6.2% in the second quarter, a near-three-decade low. That’s still pretty good for a middle-income country and the fastest among major economies. But it doesn’t measure up to the economies China seeks to emulate: Taiwan, South Korea and Japan. These economies all enjoyed faster growth for several decades at similar stages of development. China seems to be slowing sooner than these others.
EXCESSIVE BORROWING? NOPE: Before the last three recessions, Americans were borrowing at excessive levels. This is understandable because people tend to get overconfident and less careful during good economic times. They save less and borrow more. While this recovery is the longest on record, Americans are not currently guilty of excessive borrowing. Monthly debt service as a percentage of disposable income has not been this low for well over thirty years. Household debt burdens are at historically low levels and have been for a number of years.