Week of July 31, 2017
Second quarter earnings have been anything but dull with a majority of the reporting companies beating internal estimates and market expectations. Consumer confidence jumped to a near 16-year high in July (121.1 vs 117.3 in June) amid optimism over the labor market. In spite of the news, the S&P 500 was basically unchanged and the MSCI ACWI rose 0.1%. The Bloomberg BarCap U.S. Aggregate Bond Index slid 0.2%.
As expected, the Federal Reserve left rates unchanged while hinting that the unwinding of the balance sheet will start “relatively soon”. The committee reiterated that the economy was growing moderately, supported by solid job growth and that inflation continues to lag expectations.
The UK economy grew by 0.3% in April-June, a notable slowdown from the previous year but better than 0.2% in the previous quarter. German business confidence unexpectedly rose to record high in July and the economy continues to progress, which bodes well for Merkel in the upcoming elections. The IMF, however, cut its economic growth forecast for the U.S. and U.K.
What are we reading?
Below are some areas of the market we paid particularly close attention to this week. For further information, we encourage our readers to follow the links:
IMF Cuts 2017 Growth Forecasts for UK and US
The International Monetary Fund cut its growth forecast for the UK economy to 1.7% (0.3 points lower) given the tepid performance so far. The fund also downgraded US growth forecast to 2.1% in 2017 & 2018 citing President Trump’s failure to deliver tax cuts.
Fed Stands Pat on Rates, Signals September cut in $4.5T balance sheet
The Federal Reserve unanimously decided to leave rates unchanged this month. It also provided clues on its plans to trim its massive $4.5 trillion bond portfolio by stating it would start unwinding its balance sheet “relatively soon.” Most analysts are interpreting the language to mean the Fed will initiate its previously announced balance sheet reduction plan at its September meeting.
Strong Earnings are More Rocket Fuel for Stocks
Halfway into the second quarter, earnings are pointing to better-than-expected results. The companies in the Standard & Poor's 500 stock index are on course for overall profit growth of 10.7%, up from 8% on July 1. That puts the broad stock market gauge on track for back-to-back quarters of 10%-plus growth for the first time since 2011, according to earnings tracker Thomson Reuters.
Fun Story of the Week
You Want Snark with Those Fries? No One is Safe from Wendy's Tweets
“Wendy’s Co. has become the mean girl of Twitter”, according to this article. Rather than tweeting broad information, Wendy’s delivers its Tweets with a sharp tongue.
For example, in March, McDonald's announced it would use fresh beef in its Quarter Pounders. Wendy’s tweeted, “’So you’ll still use frozen beef in MOST of your burgers in ALL of your restaurants? Asking for a friend.’” Fans of the restaurant tweet Wendy’s to see how they will respond. One asked what Wendy’s thought about Burger King being their favorite restaurant. Wendy’s responded, “Sorry for your taste buds.” What is the impact? Followers on Twitter are up 80% in the last year and 18-to-21-year-olds perception of Wendy’s brand has strengthened
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S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large and mid-cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.