Simply Money

Simply Money

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Latest worries include Brexit, China, and earnings

Corporate profits, drama around “Brexit,” and the trade war with China were front and center last week.

With 93% of large companies having reported earnings, another strong quarter is in the books. Compared to the same time last year, sales, on average, have grown about 8% and earnings have increased 26%, according to Bloomberg.

However, at Simply Money Advisors, we expect earnings growth to weaken - but remain positive - in 2019. Some of the reasons we believe earnings could come in below analysts' expectations are slower global economic growth rates, lower oil prices, a stronger U.S. dollar, fading effects of tax reform, higher labor costs, and increasing tariffs.

Earnings growth could end up closer to 5% in 2019 than the expected 10%. As long as recession risk remains low though, earnings should still climb.

The United Kingdom (UK) and the European Union (EU) agreed on a Brexit deal last week, but considering the uproar around it, it may not be able to get through Parliament in its current form.

After the deal was announced, UK Brexit Secretary Dominic Raab resigned, and calls mounted for a “no confidence” vote in Prime Minister Theresa May. To start the possible change in leadership, 48 UK lawmakers must submit letters of no confidence. So far there have been 42 letters.

Also last week, China sent a list of trade concessions to the U.S. This is something President Trump asked for ahead of his meeting with Chinese President Xi near the end of November. While President Trump said the list is not yet acceptable, he also said he thinks a deal will be made.

A comprehensive trade deal from the Trump-Xi meeting is unlikely, but it could lead to a ceasefire and further negotiations.

Federal Reserve (Fed) Chair Jerome Powell had a significant communication blunder last month when he implied the Fed has a long way to go in its rate hiking campaign. Fortunately, he and other Fed members are now walking that back.

For example, just last week, Chair Powell said the Fed needs to be thinking about how much further to raise rates, which suggests a more gradual approach. A rate hike in December and about two more hikes in 2019 are expected.

The Simply Money Point

These ups and downs in the market we've recently experienced could remain with us for the next few months.

However, the data points to a U.S. economy that is still on firm footing with little risk of recession in the next six months. This should ultimately be good for investors, but we will continue to watch for any signs that point to a recession, as that would imply further market volatility.

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