Simply Money

Simply Money

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Strong corporate earnings help to stabilize stocks

Stocks were little changed last week as solid corporate earnings helped to offset concerns about higher interest rates and the trade war with China.

So far, according to Bloomberg, about 17% of large companies have reported their earnings for the previous quarter, and the results have been good: profits are approximately 21% higher (on average) compared to the same time last year. This strong showing is due to a healthy economy and corporations paying less tax thanks to tax reform.

Earnings will continue this week with Amazon, Alphabet (Google's parent company), and Microsoft taking the spotlight.

Also last week, trade tensions with China escalated as President Trump announced the U.S. will withdraw from the Universal Postal Union. This agreement allows for developing countries (like China) to ship small packages to the U.S. for close to nothing.

President Trump believes this gives China an unfair advantage over other companies, including those in the U.S., which must pay more to ship. The withdrawal process takes up to a year, so it’s possible the U.S. remains in it if a better deal than the current one can be struck.

On a positive note regarding international trade, the U.S. Trade Representative’s Office notified Congress it intends to open trade talks with the European Union, Japan, and the United Kingdom. There is a 90-day period waiting required after this notification before talks can officially begin.

This week, we will get the “report card” for the U.S. economy in the form of Gross Domestic Product (GDP). Economists expect that economic growth from July through September was 3.4%, which is slightly lower than the blistering pace of the second quarter’s 4.2%. This growth will support the case from the Federal Reserve, our nation’s central bank, to continue to raise short-term interest rates at a modest pace.

The Federal Reserve is expected to hike short-term interest rates in December, and up to three times in 2019. If they hike that much, the U.S. economy could start to feel some pressure.

The Simply Money Point

The robust U.S. economy and increasing corporate profits are very good news for stock investors.

However, there are longer-term economic concerns we at Simply Money Advisors are continuing to watch very closely, such as the Federal Reserve possibly hiking short-term interest rates too quickly and a growing U.S. deficit, which came in at a very high $779 billion for the fiscal year 2018.

But for now, the data continues to point to a healthy economy when looking out over the next six to nine months.

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