FAQs on the Markets and Economy
What’s going on with Brexit?
The election of Boris Johnson as the next UK prime minister has further raised uncertainty over Brexit and increased the risk of an economically damaging no-deal solution. Johnson has pledged the UK will leave the EU on Oct. 31 whether or not a new agreement can be reached by then.
A no-deal Brexit ranks as one of the chief threats to the slowing world economy, according to the IMF’s latest assessment of the global outlook. The IMF is now forecasting global growth will slow to 3.2% in 2019 — the weakest rate in a decade — before picking up to 3.5% in 2020. However, the projected pick-up in growth next year is precarious, relying on authorities reaching an agreement over Brexit, as well as progress in resolving in US-China trade differences and other policy issues.
We still feel the odds are that the UK leaves the EU with a deal. But Brexit is extremely complicated, making it impossible to predict exactly how and when this will all play out. Most economists and business groups think a no-deal scenario would be disastrous, erecting customs checks, tariffs and other barriers between Britain and its biggest trading partner. In the meantime, uncertainty around the issue continues to weigh on what is an already weakening European economy.
Our portfolio positioning, with a material underweight to European equities, reflects this reality.
What is the Fed telling us about its action at its month-end meeting?
Federal Reserve Chair Jerome Powell has all but confirmed an interest rate cut at the Fed’s upcoming meeting on July 31. Despite the recent progress with China on the trade front, a stronger-than-expected jobs report and improving retail sales, Powell has stated that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the Fed’s U.S. economic outlook.
Based on the federal funds futures market, the implied probability puts a 65% chance of a 25 bps cut and a 35% chance of a 50 bps cut (see chart). If the Fed decides to cut at the July meeting, we think it will cut only 25 bps, not 50 bps.
What is expected from the upcoming Q2 GDP release on July 26?
The Atlanta Fed is currently projecting Q2 GDP growth to come in at 1.6%, down from Q1’s growth of 3.2%.
It is important to note that the Q1 report was elevated due to odd timing of imports and exports surrounding the actual and threatened tariffs. A reversal of that strength is expected in the Q2 data.
Q2 is expected to show a large bounceback in consumption. It was very low in Q1, registering just 1.2%. It was brought down by the harsh winter weather, concerns of government shutdown and a temporary drop in consumer confidence.
Strong auto sales are expected to help give a boost to the durable goods component, which fell in Q1.
What is the outlook for Q2 earnings season?
Faced with headwinds from slowing global growth, trade uncertainty, the stronger dollar and fading benefits from last year’s tax cuts, U.S. corporate earnings growth has been slowing, as we have projected.
Consensus estimates have been lowered, and currently Q2 S&P 500 EPS is expected to post a 3% decline. Should this hold, it would mark the first time the index has reported two straight quarters of negative earnings growth since the first half of 2016.
Actual results thus far have been a bit better expected, but guidance has been mixed, and it remains too early to draw conclusions about if further downside to consensus exists for the year. Nonetheless, we think fundamentals of the economy still support improving modest earnings growth and modestly higher stock prices moving forward.
In the meantime, we will be closely watching management commentary on trade and estimate revisions for clues on these impacts as the reporting season unfolds.
What is City National Rochdale’s investment outlook?
Given our continued positive assessment of the fundamental backdrop, we remain positive on equities in general and continue to see attractive prospects in the opportunistic fixed income class.
Still, downside risks have increased somewhat and the investment landscape is growing more challenging.
Late-cycle conditions of slowing growth and greater vulnerability to policy missteps will require investors to change their approach and be more selective in their portfolios.
None of this means there are not more opportunities ahead for investors, but gains are likely to be more muted. At the same time, concerns over global growth, trade tensions and the path of interest rates mean markets will likely continue to be subject to periodic swings in sentiment and potential pullbacks.
Our equity and fixed income research teams have made deliberate risk-mitigating changes to help fortify client portfolios against the type of market turbulence we have recently experienced, while leaving them well-positioned to take advantage of opportunities that present themselves.