Weekly Market Commentary February 11, 2019

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U.S. stocks finished barely positive last week. The S&P 500 inched 0.1% higher on a relatively light week for news. The government shutdown has delayed a number of key statistics about the strength of the U.S. economy and given investors less data then expected to evaluate it. Earnings continued to outperform expectations. Last week’s earnings raised growth expectations to above 13%.

Trade negotiations between the U.S. and China remain a key focus. U.S. negotiators head to Beijing for the next round of negotiations this week. A possible meeting between President Donald Trump and President Xi Jinping prior to the negotiation deadline was ruled out by the U.S. Markets dropped on Thursday in response to concerns trade negotiations weren’t going as well as anticipated.

Global stocks also ended the week higher. The MSCI ACWI moved up 0.5%. Bonds finished higher, too, as the Bloomberg BarCap Aggregate Bond Index rose 0.4%.

Key Points for the Week

  • U.S. corporate earnings continued to beat expectations by normal rates.
  • U.S.-China trade negotiations made progress but not as much as expected.
  • Optimism is highest for U.S.-focused companies.

Market Analysis

Managing and meeting expectations is a key driver of investor reactions to news. Last week, the U.S.-China trade negotiations provided an example of how heightened expectations can put pressure on markets.

The negotiations are making progress, and U.S. representatives will travel to Beijing for the next round of talks. However, the U.S. backed away from a possible summit between President Trump and President Xi prior to the early March deadline set by the two countries. Reports indicated the negotiations haven’t reached the point of creating a written document of resolved and unresolved issues that is normal prior to the two heads meeting and ironing out the final agreement.

Investors had expected greater progress and continue to expect a deal, so the slight step backward moved markets in the latter part of the week because it failed to meet expectations.

Corporate earnings are another area where expectations matter. Corporations manage market expectations, so results typically beat them by a modest amount. This quarter, 71% of S&P 500 companies have beat expectations, which is about average.

The accompanying chart shows how slowing global growth and concerns about trade have pushed down expectations for global companies next year. S&P 500 companies deriving more than 50% of their revenue outside the U.S. are only expected to have earnings grow 1.9% on revenue growth of 3.1%. These dampened expectations may create an opportunity for global firms to outperform. The expectations for domestically focused companies are far higher and may be difficult to achieve.

This leads us to the most important expectations issue of the week: What is expected of you this Valentine’s Day? For those giving gifts, we hope you have managed those expectations well.

Fun Story

Woman’s obituary gets the last laugh

Sybil Hicks wrote her own obituary before passing away on February 2. Her obituary has become quite popular on social media as her sense of humor truly showed. The most popular line includes a joke about her being cremated, “I finally have the smoking hot body I have always wanted.”

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