Market Perspective - July 2018

1. Market Perspective – July 2018
Experience Insight Impact
Overview: Recent headlines regarding a potential global trade war have put a dent in equity
performance around the world, with Emerging Markets feeling the worst of the impact as
currencies fluctuated. This Market Perspective dives further into the real impact on earnings and
economics of a disruption in global trade. Although time will tell, we caution that the trade
headlines are rapidly changing. Using a long-term perspective, the current headlines may be more
noise than substance.
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2. Currency Fluctuations Have Been Material
Experience Insight Impact 2
While the dollar has been in a long-term downtrend, the recent tariff headlines
(which began in April) have caused more than a 5% rally in the U.S. dollar. This has put
pressure on International securities more broadly. Longer term, with fiscal stimulus
abound and deficits growing, the expectation for a weaker dollar persists. Emerging
Markets tend to be correlated to the U.S. dollar and accordingly, have been weak.
Source: Bloomberg

3. Earnings Growth Projections
Experience Insight Impact 3
Last month, we showed the above chart which suggests 2nd Quarter earnings will continue to
advance more than 20%, even with the noise surrounding tariffs.
Source: Bloomberg

4. Labor Markets Remain Strong
Experience Insight Impact 4
Recent data from employment reports also suggest companies are not pulling back on
hiring at this point due to global trade concerns. Jobless claims remain near cycle lows,
as does the unemployment rate which is hovering near 4%.
Source: Bloomberg

5. Tariff Impacts Remain A Manageable Albeit Negative Headline Risk
Experience Insight Impact 5
The figure above (left) shows that the impact of the Tariffs, while not immaterial, are also not currently impactful.
On the right is the market cap weighted revenue exposure to China of S&P 500 companies. Once again, while not
immaterial, 6.6% exposure is reasonably small given the impact would not be more than a small fraction of those
sales (which largely are going to get passed along to U.S. consumers).

6. Headline Risk Is Partially Offset By Buybacks (And The Positive Impact On EPS)
Experience Insight Impact 6
Share Repurchases for the first half of this year are close to double that of prior
year’s results, which mathematically should help boost overall earnings growth.
Source: JP Morgan

7. Overall GDP Growth Remains Strong
Experience Insight Impact 7
The current estimate for
GDP growth in the 2nd
Quarter from the Federal
Reserve Bank of Atlanta is
3.9%, an above-trend
number which has
remained robust despite
the near-term noise. We
will be watching future
quarters to see if the
underlying components
begin to weaken, as the
global trade headline risk
lingers.

8. Market Perspective – July 2018
Experience Insight Impact
Conclusion: While global trade concerns have put a damper on global equity markets for now
(e.g. from their highs, the S&P is off 3-4% while the more industrial focused Dow Jones is down
7+% and global stocks even more), the underlying fundamentals have not seen much, if any,
impact yet. We will be aggressively monitoring the situation to determine if changes are
warranted. Our focus remains long-term for our clients and as we try to separate the noise from
the fundamentals, we will adapt portfolios to the ever-changing world.
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9. Disclaimer
Experience Insight Impact
Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.
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