Economic And Company Data More Positive, But Headwinds Exist

One area of the economy in both the U.S. and abroad that has garnered heightened attention of late is the manufacturing sector. Based on business surveys it is clear trade and tariff issues are having a more significant impact on the manufacturing sector. As the below chart shows the Purchasing Managers Index for manufacturing has dipped below 50 in the Eurozone yet remains above 50 in the U.S. A reading below 50 indicates the manufacturing sector is contracting, but not necessarily a recessionary level reading. Recessionary readings generally are in the low 40's area. Although the U.S. manufacturing PMI is above 50, the sector has slowed since its mid 2018 level.

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Low Bullish Investor Sentiment And Equity Fund/ETF Outflows

In the most recent report on investor sentiment by the American Association of Individual Investors, individual investors continue to express a low level of bullish sentiment. As the sentiment indicators are contrarian ones, a low bullish sentiment reading is viewed as one positive for higher equity prices. No one indicator works in a vacuum, but it does seem the individual investor remains cautious on the current equity market. The sentiment readings tend to be volatile from week to week, as a result evaluating the 8-period moving average smooths this volatility. For the week, the 8-period moving average did tick slightly higher to 30.5% from the prior week but remains at a lower level.

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Buybacks Down In First Quarter 2019, But Remain Near A High

Late last month S&P Dow Jones Indices reported preliminary dividend and buyback results for the S&P 500 Index for first quarter of 2019. On a quarter over quarter basis dividends declined by $2.48 billion. This sequential decline in the first quarter versus the fourth quarter is not an uncommon occurrence. On a YoY basis dividends were up 7.46% and this was down from the fourth quarter YoY growth rate of 9.46%. Buybacks declined by $17.17 billion on a QoQ basis. As reported operating earnings were up significantly on a QoQ basis, +$48.32 billion or 19.9%, but only up 3.54% on a YoY basis.

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Summer 2019 Investor Letter: A Rate Cut Seems Near

The headwind created by the trade and tariff issues formed a heightened level of uncertainty facing the economy and the market; however, the stock market, yet again, scaled the proverbial “wall of worry” over the first six months of this year. The June total return for the Dow Jones Industrial Average of 7.3% was the best June monthly return since 1938. Further, for the first half of 2019, the S&P 500 Index recorded its best six-month total return in twenty-two years increasing 18.5%. As of July 2019, the U.S. economic expansion that followed the Great Recession becomes the longest on record at 121 months. The second longest expansion was from 1991 to 2001 with a length of 120 months. In our Summer 2019 Investor Letter we discuss how some of today’s policy decisions are beginning to rhyme with the 1991 to 2001 period. One of those policy decisions centers around a likely Fed Funds interest rate reduction by the Fed at the end of July. What may seem unusual is the fact an interest rate reduction seems likely at a time where the stock market is near an all-time high and the economy continues to expand. This is discussed in more detail in the Investor Letter.

Economic data is suggesting a slowing global environment, but a recession seems further out than near. Furthermore, it appears the Federal Reserve will reduce rates by 25 basis points at its July meeting, if for no other reason than to provide an “insurance cut” to push out a potential recession. More insight on our views for the balance of the year are covered in the Investor Letter accessible at the below link.

• Summer 2019 Investor Letter

Dividend Payers Return Lags The Return Of The Non Dividend Payers

S&P Dow Jones Indices recently reported the return for the dividend payers and non-dividend payers in the S&P 500 Index for the period ending June 28, 2019. Given the underperformance of the value style over the past several years then it is not surprising the dividend payers are underperforming the non-payers on an average return basis year to date and over the trailing twelve months. The dividend paying stocks tend to be more defensive and have a value tilt. 

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Earnings Growth Expected To Increase From Here

Second quarter earning season kicks into gear in the coming week and a lower bar seems set by a number of firms. Downward estimate revisions are occurring in twice the number as upward estimate revisions. As it stand now, second quarter earnings are estimated to be lower than the same quarter last year by 1.9%, yet I expect earnings growth in the quarter to be positive when the reporting season comes to a close.

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Investors Are Selling Equities: Not A Typical Behavior At Market Tops

After a brief summer vacation and now catching up on some market research, recent fund flow data caught my eye. In this week's ICI fund and ETF flow/issuance report, equity out flows totaled a sizable $28.8 billion. Of this amount $25.2 billion represents outflows from U.S. domestic funds and ETFs. This is the second week in a row that equity flows have been negative. On the receiving end, bond funds and ETFs had inflows of $10.4 billion for the six day period ending July 2 and inflows of $10.5 billion in the prior week. ICI data is reported with a weekly lag. More current Lipper flow data is showing equity outflows continuing for the week ending July 10. This flow data makes it difficult for me to believe the equity market has reached a top. That does not mean one will not see equity market pullbacks, but investors seem far from 'all-in' as they say.

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