GCM June Market Commentary

GCM June Market Commentary

Dear clients & friends,

Talks of a trade war are back in the headlines, though we can’t exactly say they ever left… just temporarily relegated to page 2. As has been the case all year, politics and international diplomacy continue to keep market participants on their toes. 

To be clear, economic data including GDP and unemployment remains reasonably strong, and we are not hearing the analysts we trust talking about a recession on the near horizon. Yes, interest rates and inflation are rising, but at a very slow, controlled pace. The Federal Reserve has indicated that they plan to watch economic conditions very carefully in their attempt to keep things stable. This is all good news.

Furthermore, earnings reports this year have been very positive with solid revenues as well. This tells us that the new tax law is not the only reason companies are thriving. The response to positive earnings, however, has been asymmetrically negative. Companies that beat expectations are being punished and companies that miss expectations are being punished even more harshly. This is where a resolution to trade tensions becomes of paramount importance. 

A few companies, including Harley Davidson, have recently made announcements indicating that ongoing trade battles are expected to have a negative impact on profitability. While the list is short (and most of the companies on the list have had profitability issues exclusive of the trade war), we see these announcements as potentially the first sign of challenges ahead for US stocks as a whole. 

European equities continue to look attractive from a valuation perspective but concerns over populist political movements in Italy and Spain, ongoing Brexit negotiations, and trade are keeping the euro and equity prices depressed. Banks like BNP Paribas and consumer goods companies like Daimler (the parent of Mercedes) and BMW are the primary victims at this point. 

Earnings season will kick off in a few weeks with the big US banks leading the way, and as readers of our newsletter know, earnings are the foundation of valuation. While we remain optimistic and expect many companies to deliver another quarter of stellar results, we will be watching the analyst notes very carefully. If lots of CEOs (especially those in the tech industry) cite trade as a reason to temper expectations and revise numbers downward, we will have no choice but to take a more defensive stance by raising some cash (up to 5% or so). Our first targets for reduction would likely be international equities and the financial services sector. 

It’s important to emphasize that our long-term view is still constructive and that this renewed fear could be temporary. Trade battles precipitated the Dow’s nasty 1,000+ point decline in early February, but markets resumed their upward climb within a few weeks as those concerns subsided. An announcement that negotiations between Washington and Beijing have been successful could (and likely would) send the markets sharply upwards. Strong Q2 earnings and revenues coupled with upward revisions for Q3 could (and likely would) send markets sharply upwards. There is still lots of opportunity for good news, but we are watchful. 

We wish you all a happy summer and safe travels wherever you may be headed. 

Peter & Ben




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