In 2019, Bad News Is Good And Good News Is…Also Good News

Here are some facts:

    • At 121 months, we are currently in the midst of the longest period of economic expansion in U.S. history.
    • The U.S. yield curve has remained inverted for over a month, a conventional indicator of an oncoming recession.
    • A rate cut at the end of the month is all but guaranteed, as Fed Chair Jerome Powell has repeatedly cited inflation and slowing global growth as concerns.

And yet….

The S&P 500, NASDAQ 100, and Dow Jones Industrial Average are all at record highs.

Historically, this wouldn’t make much sense. Why would the market react positively to a rate cut? And despite the ongoing trade tension with China, does it make sense that, according to Lipper Alpha, ETFs and mutual funds took in more than $260 billion in new money during the first two quarters of 2019?

Of course not. But in 2019 all news is good news, even when it isn’t.

The unfortunate reality of economic data is it’s next to impossible to truly paint a complete picture. Unemployment is hovering around 50-year lows—that’s good. But consumer confidence is at its lowest level since September 2017 and dropping—that’s obviously not.

Both bulls and bears have their ammo and are not afraid to use it. The bulls will say today looks like 2012, with rising markets and interest rates primed to go lower. The bears will argue this looks like 2007, with the market at all-time highs and some shaky underlying economic data. A flip-flopping Fed probably hasn’t helped matters as well.

So where does this leave us as we head barreling towards earnings season? Corporate earnings declined year-over-year in the first quarter, and as FactSet noted, expectations are lower for the second quarter.

“For Q2 2019, the estimated earnings decline for the S&P 500 is -2.6%,” Senior Earnings Analyst John Butters wrote in a note. “If -2.6% is the actual decline for the quarter, it will mark the first time the index has reported two straight quarters of year-over-year declines in earnings since Q1 2016 and Q2 2016.”

The upshot: keep your eye on the horizon when it comes to long-term investing but be flexible in the short-term: things may or may not get bumpy.

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