Five Forecasters: Few Warning Signs

It’s been a difficult year for Wall Street forecasts. The Federal Reserve’s (Fed) pause and global uncertainty have forced many economists and market prognosticators to adjust their 2019 predictions. LPL Research is in that camp, too: We adjusted a few of our 2019 economic and fixed income forecasts in February.

Near-term forecasting has been a futile effort this year, thanks to headline risk from trade and political headwinds. However, our Five Forecasters (in the Recession Watch Dashboard), which measure the longer-term health of the economy and financial markets, point to a continued economic expansion. This week, we’re highlighting two of the five leading indicators we watch: the Conference Board’s Leading Economic Index (LEI) and the U.S. yield curve. For analysis on the other three indicators, check out this week’s Weekly Market Commentary and today’s Macro Market Movers Blog.

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Earnings Season Takeaways

Earnings season delivered as expected. With 92% of results for S&P 500 Index companies in the books, first quarter 2019 earnings are tracking to roughly flat with the prior year [Figure 1]. While flat earnings don’t sound impressive, we consider it a victory given consensus estimates were calling for a 4–5% decline when earnings season began (source: FactSet). Here, we recap the numbers and provide some key takeaways from earnings season.

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A Step Back On Trade

Investors aren’t quite out of the woods yet with trade tensions. On May 5, President Trump threatened to raise tariffs to 25% (from 10%) on $200 billion in Chinese imports, surprising investors who thought the United States and China were close to a deal just a few weeks ago. Five days later, the U.S. announced it would impose higher rates on that swath of goods, and China announced its own tariff increase on $60 billion in U.S. goods. Now, the U.S. is considering higher tariffs on all Chinese imports.

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DC Fly In With LPL Government Relations

Judy and Lisa had the opportunity to spend time in our nation’s capital with the LPL Financial Government Relations team and a handful of fellow advisors. Like last year, this is a trip we are humbled by the opportunity to represent our clients, our firm and our community.

While in Washington, D.C., we dedicated ourselves to advocating, educating, and relationship-building with members of Congress on both sides of the aisle. Our messages centered on emphasizing that we are small business owners who are embedded in our communities and provide vital financial services. Moreover, in each meeting, we described how we support “Main Street” investors, deliberately distinguishing ourselves from “Wall Street.”

It is a privilege that Judy and Lisa both sit on the LPL Political Action Committee Board. You can always read more about LPL’s policy positions by visiting the Advocate page on the LPL Government Relations website. It is our continued commitment to you to continue to advocate on your behalf when given the opportunity.

As a small recap, if you are interested in learning more about who we met with or what we discussed, please see below. We left feeling confident that our voices were heard and those we met with have a better understanding of how certain policies will affect our business and you as the end-investor.

We had the opportunity to engage with the following Members:
Former Congressman Frank Guinta (R-NH)
Congressman Josh Gottheimer (D-NJ)
Congresswoman Norma Torres (D-CA)
Congressman Marc Veasey (D-TX)
Congresswoman Ann Wagner (R-MO)
Congressman Brett Guthrie (R-KY)
Rick Dearborn (Former Deputy Chief of Staff to President Donald Trump)
Congressman Anthony Gonzalez (R-OH)
Senator Doug Jones (D-AL)
Jeff Wieand, Office of House Republican Whip Steve Scalise (R-LA)
Congressman Ron Estes (R-KS)
Brittan Specht, Office of Republican Leader Kevin McCarthy (R-CA)
House Majority Leader Steny Hoyer (D-MD)
Congressman Jason Smith (R-MO)
Congresswoman Grace Meng (D-NY)
Congresswoman Joyce Beatty (D-OH)
Congresswoman Katherine Clark (D-MA)

We touched on the following policy issues affecting our industry:

1. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. There is a retirement savings crisis in our country and most Americans live with the fear of saving enough for retirement. This is a piece of legislature that could potential see a House vote this week and has bi-partisan support. It is geared toward making small business have easier access to offering retirement savings plans. It also considers extending the age of RMDs past 70.5 as we continue to live longer.

2. SEC Regulation Best Interest Standard. A continued discussion from last year’s trip – LPL will continue to work with policymakers at the federal and state levels to promote rules establishing a harmonized best interest standard for the financial services industry, while ensuring that investors maintain access to all available financial services.

3. The 20% pass-through deduction (included in the Tax Cuts and Jobs Act) Our industry has felt that this provision has an unfair advantage given to insurance agents over financial advisors. By allowing the same pass through deduction for companies that can offer similar or same products, it hinders financial advisors when it comes to growing their practice and keeping client fees as low as possible.

Deal or No Deal

U.S.-China trade tensions escalated last week. President Trump increased tariffs on $200 billion of Chinese imports to the United States from 10% to 25% and has threatened to put 25% tariffs on an additional $325 billion of Chinese goods—a process that could begin this week, though it would take a couple of months to implement.

Stocks reacted as you would expect, falling 2.1% over the five trading sessions. It could’ve been worse, but the S&P 500 Index gained 0.4% on Friday after Treasury Secretary Steven Mnuchin reported that talks on Thursday and Friday were constructive. Though this slide could certainly go further (and is, as of the morning of May 13), it has been quite modest to this point. In fact, as of its close May 10, the S&P 500 had not experienced more than a 3% pullback yet this year. Even with Monday morning’s losses, the index sits only about 4% from its record closing high of 2945.83 on April 30, 2019. Here, we put this pullback in perspective and discuss prospects for a trade deal in light of the events of the past week.

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The Power of Productivity

Recently, the U.S. economy has shown resilience in powering through political and trade noise. One of the most encouraging reports of late was on productivity (output per hour worked) among nonfarm employees. First quarter productivity rose at the fastest year-over-year pace since 2010, while unit labor costs grew at the slowest pace since 2013.

Growth in productivity is a key part of our economic outlook. Higher productivity boosts both consumer and corporate well-being, feeds into gross domestic product growth, and helps promote healthy inflation. A resurgence in productivity could provide the U.S. economy a timely boost, especially as many wonder what could extend this near-record expansion [Figure 1].

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Sell In May?

“Sell in May and go away” is probably the most widely cited stock market cliché in history. Every year a barrage of Wall Street commentaries, media stories, and investor questions flood in about the popular stock market adage. This week, we tackle this commonly cited seasonal pattern, and why some seasonal weakness could make sense in 2019.

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A High Bar for Lower Rates

Once again, the Federal Reserve (Fed) and the markets are at odds with each other. The Fed announced it would keep rates unchanged at the conclusion of its most recent policy meeting on May 1, and Fed Chair Jerome Powell delivered comments that mirrored what he’s said for the past few months.

Still, bond markets are staunchly positioned for a lower fed funds rate, even as economic data have shown signs of recovery. Fed fund futures are pricing in more than a 50% chance of a rate cut in 2019, and short-term yields have dropped below the upper-bound fed funds rate for the first time this cycle. While investors are literally buying into this possibility, we see the Fed’s continued pause as the most prudent approach [Figure 1].

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