Q3 earnings reporting hits full stride this week as the markets continue to grapple with geopolitical pressures. At the close today the Dow fell 126 at 25,317. Trading volume was lower than a snake’s belly in a wagon rut. It was also reported that Canadian Polar Bears are liquidating portfolios and putting their money into ……snow banks! Ha ha.
Steel Dynamics, based in Fort Wayne, Indiana, reported a 32% increase in sales and a profit jump of 156%. Steel Dynamics noted on the call that big picture economic conditions are positive for domestic steel consumption and sees strong growth into 2019 and high customer optimism across its markets.
With stocks struggling, and the S&P 500 up only about 3.5% so far this year, Brian Wesbury, economist at First Trust and honorary member of the Westport mafia, noted that earnings reports so far, show profit growth at 22.7% and revenue growth at 7.4%. While these numbers appear good (and they are) some are worried that they represent a peak. Gurus at John Hancock noted that the gap between earnings growth and stock valuations is widening which we have not seen since late 2009 and could be a signal that stocks are becoming a better value. To close the gap we must see either a rise in stocks or a drop in earnings.As of now the later is not happening.
While the US economy hums along, international economies appear to be under pressure. Housing in China is slowing and Xi is hinting of a possible stimulus effort to keep things going. Europe is grappling with Brexit and Italian budget issues and the IMF has begun to downgrade global economic growth forecasts as emerging markets struggle in the face of a rising US interest rates and a strong dollar. Bond guru Mohamed El-Arian at Allianz has noted a divergence between the US economy and international economies and indicated that this divergence in economic growth could lead to rising volatility in stock markets. Stay tuned.