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Morning Commentary

MORE TARIFFS, MORE FODDER

By Charles Payne, CEO & Principal Analyst
9/3/2019 9:38 AM

Last week was a good week for stocks, which reacted as much to earnings news and fundamentals than the latest salvos in the trade war and drumbeats of recession, which has become a favorite theme for many hoping for a change in the White House next November. 

The big news coming into the week are new tariffs triggered in the United States and China (so much for “signaling they would hold off”), and reports of indecision over when they’ll have the next meeting.  Now, October 1st looms large, as existing tariffs on $300 billion in Chinese exports are supposed to move to 30% from 25%. “A billion here and a billion there and soon you’re talking about real money.”

I appreciated last week’s overall market resolve, but I watched especially the Transportation stocks.  The Dow Jones Transportation (DJT) Index is still depressed but nearing key resistance levels.

We’re Going to Need a Bigger Soapbox

I can’t say enough how many mavens called for investors to brace for an earnings recession in the first quarter, and most of them got on taller soapboxes to warn about the earnings recession in the second quarter.

The chorus of undaunted mavens have gotten larger, and they are sure the third-quarter earnings are going to be a disaster this time.

Sure, other observers that see bad stuff out there that have no political motivation, but they almost always seem to be negative (or as they might say “cautious”). On that note, the same experts that called for a deep swoon in second-quarter earnings are now looking for a weak year-over-year. 

According to FactSet, during the first two months of the quarter, earnings consensus has declined 3.0%, which is more than the typical 2.6% decline in estimates. As the table below shows, it’s rare when the experts see stronger earnings during any given quarter.

Right now, the Street sees $41.64 down from $42.90 a few weeks ago.

Apparently, all eleven sectors are seen coming in below the consensus. One thing that’s very important to point out is 2018 was a record year for corporate earnings, and no one thought it would be repeated.  To that point, I must say the first half of the year has been much better than anticipated and impressive based on difficult comparisons.

GDP Estimate Decline

Still, economies and markets are cyclical, so I think we should be careful about reacting to ebbs and flows as the beginning of the end rather than periodic resets. The Atlanta Fed Gross Domestic Product (GDP) now forecasts for the third-quarter (3Q) 2019 GDP to edge lower to 2.0%, down from 2.3%.

Key Changes

Today's Session

As expected, the market will open lower as there was no ghost in the machine on trade and new tariffs. The decline for the moment is reasonable as major indices have settled into trading ranges and continue to ping back and forth off support and resistance. This has left a lot of great individual news and developments under-represented in stocks and exacerbated bad news which means many losers are probably oversold as well. The problem is there is no rule these circumstances can't remain for extended periods of time and oversold stocks often become more oversold. 

The problem for investors is waiting for the bounce, which means in real life 98% will miss the bounce and ironically pay more for stocks as they rally then they would have as stocks were drifting lower.  

Meanwhile, a negative article in the WSJ on Boeing (BA) adding more pressure to the overall market (its most influential name on the Dow Jones Industrial Average). 


 

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