Equity Overview

The market downturn left no categories untouched, with growth and value stocks across the large, mid, and small cap spectrum all sustaining substantial losses.  The silver lining is that the forward 12-month price/earnings ratio for the S&P 500 now stands at a relatively favorable 16.1, below the 5-year average of 16.5.

First quarter corporate earnings reported in May were modest.  With 97% of S&P 500 companies reporting, the blended growth rate is now -0.4%, an improvement from the -2.3% rate in April but still disappointing in light of the strong gains in 2018.  While 76% of companies have beaten consensus earnings estimates (level with the one-year average), only 59% have beaten consensus revenue estimates, below the one-year average of 67%.

Macro Overview

Continuing the recent trend, economic data reported in May was mixed—and in some cases, contradictory.  Manufacturing was weak, but new factory orders were higher. Employment was strong but retail sales declined.  Housing starts rose but home sales fell.  On the bright side, the Commerce Department’s revised estimate of 1^st quarter GDP growth was 3.1%, only modestly below its initial estimate of 3.2% and still significantly higher than projections.

Monetary policy has executed a 180-degree turn in 2019.  In January, markets had assumed there would be one more interest rate hike this year.  That shifted in April to an expectation of steady rates for the balance of the year.  Then in May, Chairman  Powell implied that the Fed would step in to support the economy if necessary, and the futures markets are now pricing in a rate cut in July.

The trade dispute with China worsened in May, as the U.S. raised tariffs on $200-billion in Chinese goods.  China responded by raising tariffs on $60-billion in U.S. goods.  There appears to be no clear path to a resolution.

In Great Britain, Teresa May finally resigned as prime minister.  Her goal of a Brexit deal acceptable to all factions of her electorate, as well as to the European Union, proved to be impossible.  It now appears that a “no-deal” or “hard” Brexit in October is likely, an eventuality which many observers believe will be highly problematic.