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The Sharp Financial Group Reviews the Economic Moment: Q2 2019

July 30, 2019
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One of the biggest challenges business owners face is to balance their deep understanding of their own micro world with larger macro trends. It’s important to know that the price of a commodity has risen or fallen or whether a supply chain is likely to be disrupted in a key market. But without an understanding of where those trends fit into the global context, it may not be enough to make critical strategic decisions. And yet, few business owners have the time and resources to understand both their world and the global economy. For that reason, The Sharp Financial Group is delighted to deliver a recap of the second quarterly webinar on global economic trends.

In the webinar, Sharp’s Chief Investment Officer, Alain Van Loo, provided business owners with data-backed analysis and predictions of where the current economy is and where it may be headed. Here is a summary of the topics addressed during the webinar:

Top Line Recap Comparing Q2 Trends with Q1

In the April Q1 webinar, the Sharp team was notably cautious around earnings. There were quarter over quarter reductions in both earnings and revenue growth, which was the first time that trend had been indicated in seven quarters going back to the end of 2016 and beginning of 2017. While the reduction didn’t turn out to be as severe as anticipated, it still decreased. Additionally, comparing Q1 to Q2, something interesting happened: earnings went up on reduced revenues, which doesn’t happen very often.

Another top line trend is that trade tensions and global volatility continues to affect the market. Iranian oil and unrest in East Asia continue to put investors on edge and to introduce volatility into American markets.

What the Sharp Economic Momentum Indicator (SEMI) Predicts

Sharp has developed a model that takes 68 economic indices to answer a key question: where is the momentum in the United States economy? To predict what future momentum may look like, this model considers a macro momentum index going back as far as 1993. This quarter, the SEMI indicated that the economy slipped into negative momentum – but it’s important to put that figure into context and realize that negative momentum doesn’t necessarily indicate a downturn. The short-, medium-, and long-term indicators that this model leverages indicate that a longer-term perspective does see potential for the stock market to rise.

An Emergent Paradigm Shift: Broader Economic Indicators Not Always Correlated with the Stock Market

Historically, when the economy does well, the stock market also does well. When the economy performs poorly, the stock market follows. But recent trends have shown that overlapping S&P performance with the rest of the economy, there is limited correlation and more divergence. The data shows that weak economic performance may not lead to weak stock market performance and vice versa. While stock market indices are reaching record highs, other indices are declining.

This trend plays out in two key areas:

Employment Outlook: 2018 job creation averaged 200,000 new jobs per month. 2019 Q1 job creation averaged 186,000 new jobs per month, and Q2 is averaging 166,000 jobs, which may start to suggest that there are cracks forming in the economy.

GDP Growth: While 2018’s GDP growth exceeded 3%, the Sharp model predicts GDP growth should come in around 2.4% for all of 2019.

Monetary Policy is Becoming More Reactionary

The monetary policy that most business owners grew up with appears to have flipped. In the past, monetary policy once behaved like supermax oil tankers, taking many weeks, if not months or quarters to react to trends. Presently, they can operate much more like a speed boat and respond to the vagaries of the market more quickly. This means that future policy may consider both long-term (traditional) as well as more near-term data to react as the facts change.

Q&A with Webinar Attendees:

The main objective behind Sharp’s quarterly webinars is to provide viewers with insights they need to make decisions. To that end, Sharp webinars dedicate a segment to answer viewer questions live. Here are the questions covered during this webinar:

How worried should we be about the upcoming presidential election affecting the market?

“Whenever you have an election cycle that comes up, especially when politics are as fractious as it is right now, it should be a cause for concern. We still have 16 months until the next major election, so there's a lot that can happen between now and then. When you're looking at what's called the online oddsmakers, the odds still favor a Trump administration re-election. That being said, the Democratic field is really wide. So, we just need to be patient and see what happens and be prepared.”

Do we expect interest rates to continue being cut through 2020 or would it be just a one-time cut?

“I have a very strong opinion on this. I definitely know that I'm in the minority on this, but I think that there is a non-negligible chance that the FED will do 50 basis points at the end of July and not for any other reason than to “break the fever.”

With the economic data concern surfacing, why is the US dollar remaining strong?

“That's a great question. The reason we're still seeing strength in the dollar is because it's the best of a bad lot. I don't mean to suggest that we're all terrible here. But in the end, flight to quality is always the way it's going even in an easing cycle argument. We're probably not going to ease as much as the other currencies. Our balance sheet may not be the best overall, but it's a heck of a lot better than let's say Italy or the UK for that matter or maybe one could argue Japan. For all our warts, at least we tend to follow through on a lot of things that we do. In other parts of the world, it's not as clear and it causes some more concern.”

How long can you we expect markets to be uncorrelated to the SEMI? Is this a sustainable trend?

“Honestly I do not have a direct answer for that. We are in a much twitchier monetary policy environment. So, what's actually happening on the ground is almost in the rearview mirror. More often than not, it's more a function of what are the central banks going to do to solve this problem. Now, this is both a good and a bad thing. It's good because let's face it, we're a real-time society where changes are always happening and you should be able to effect change if you see that change, but conversely you can also become overly twitchy.”

Does the conventional wisdom that stocks will rise, and bond yields will fall, still hold true?

“Big picture, I would argue, yes, but you have to look at everything in terms of the epoch that it's in. As you know, you can see a scenario where all assets tend to rise, but it has a very fundamental reason that this could revert again. So that's why we remain vigilant and we continue to focus.”

Disclosures

Sharp Financial Services, LLC d/b/a The Sharp Financial Group (“Sharp Financial”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Sharp Financial and its representatives are properly licensed or exempt from licensure.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.