Beats me

Nothing hurts more than expecting a cheque yet receiving a bill. Unfortunately, this is happening to millions of Americans right now, explains chief investment officer Julian Chillingworth.

Multiple dollar bills

With the American fourth-quarter earnings season wrapping up, corporate profitability has been fairly resilient. Of course, the real test will be whether companies can continue to improve in 2019.

About 70% of companies beat analysts’ expectations of earnings per share, and 60% posted better-than-forecast sales, according to FactSet. Blended across the index, final-quarter S&P 500 sales were 5.8% higher than a year earlier and earnings were up 13.1%. But what about the future? Roughly 35% of companies in the headline US equity index have lowered guidance for future profits, while just 5% think they will make more this year than last. Still, more than half of the index have stayed quiet about their prospects. Concerns about more difficult trading conditions have been hanging over stocks for some time. Late last year, as markets were slumping and investors were panicking, the P/E fell below 14x. It has now bounced back to 16.3x, higher than at any point since global equities began wobbling in October. This uptick in valuations is despite analysts expecting first-quarter earnings to fall 3.2% and remain flat the following quarter.

US economic data were perplexing in February. The number of jobs and wages are growing well, but retail spending absolutely dived in December. The ISM PMI surveys – a mix of emotional data like confidence about the future and hard numbers like upcoming orders – were also simultaneously hot and not. The non-manufacturing ISM jumped much more than expected while the manufacturing measure slumped. A fall in housing starts accelerated, with concrete slabs poured for fewer homes than at any time since 2016.

Many other economic data have started to contradict each other too. For instance, Americans enjoy a booming labour market with decent pay rises, yet more than 7 million of them are at least three months late on their car repayments. That’s the highest number since the global financial crisis. It’s a headscratcher for sure. The longest government shutdown in history wouldn’t have helped the average Joe’s outlook, for sure.

The new regime reduced the amount of income tax taken direct from American payslips (what we call PAYE). In 2017, about three-quarters of all filers received a refund averaging $2,800 because they overpaid tax during the year. The US Treasury now expects 4 million of them won’t get a refund and will instead have top-up bills to pay, despite most of them paying less tax overall.

You could try to explain to these people that this is a good thing: you should always pay your tax later rather than upfront wherever possible. But, as advisers, you’ll know that’s not how people work. People who expect a refund but get a bill instead will be incandescent with rage, regardless of mathematical reality. US Congress, meet behavioural finance …

Index

1 month

3 months

6 months

1 year

FTSE All-Share

2.3%

2.6%

-3.7%

1.7%

FTSE 100

2.3%

2.3%

-3.1%

2.2%

FTSE 250

2.6%

4.2%

-6.3%

0.2%

FTSE SmallCap

1.1%

1.4%

-5.7%

-1.7%

S&P 500

2.0%

-2.9%

-5.6%

7.8%

Euro Stoxx

2.1%

0.6%

-8.0%

-5.3%

Topix

-0.8%

-5.4%

-8.9%

-7.7%

Shanghai SE

12.9%

13.2%

7.7%

-11.5%

FTSE Emerging

-0.6%

1.7%

-0.8%

-6.0%

Source: FE Analytics, data sterling total return to 28 February

Slow progress

Global trade winds will continue to blow the way of US-China trade talks, while in the UK improved market weather will depend on some form of progress on Brexit negotiations.

We’re not expecting the world to fall into recession this year – it would take a large swing in several economies that just doesn’t look likely as things stand. Still, global growth is slowing down as the US comes off its tax-cut-fuelled peak and China struggles with over-indebtedness and export barriers. Because of this, we’re trying to stay as vigilant as possible, trying to take notice of the real issues in a world awash with information and emotion.

Italy is a particular area of suspicion for us. This debt-bomb of a country is bigger than you think, with the ability to upend the European debt market if it goes off. A tenth of the loans made by Italian banks have gone bad, according to the European Central Bank. Even worse is the absolute total of Italy’s bad debts: at €159bn it is easily the highest of any country in the bloc. Thankfully, up till now the Italian government – radical as it is – has shown itself to be very aware of the implications of going thermonuclear with its finances. Every time things come to a head, the Italian coalition has backed down. There’s always a risk that one day it stands its ground, however.

And, of course, there’s China. The nation has slowed significantly in the past few years, from 10% in 2010 to just more than 6.5% in 2018. This was always going to happen as the country grew to become a much larger share of the global economy. But there is a chance that this expected slowdown could spin out of control into a fully fledged slump. China is trying to move from a heavily industrial model to a more modern, services and hi-tech economy. To do this it needs to be deft, careful and have friends abroad. It will also have to resist the temptation to pour ever more debt on its problems and instead trust more in market dynamics.

Bond yields

Sovereign 10-year

Feb 28

Jan 31

UK

1.30%

1.22%

US

2.72%

2.63%

Germany

0.18%

0.15%

Italy

2.75%

2.59%

Japan

-0.03%

0.00%

Source: Bloomberg

Photo by Sharon McCutcheon on Unsplash.

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Rate this page:
Average: 3.7 (3 votes)

Subscribe to the In the KNOW blog email

Archive