In this week’s market update: fourth quarter earnings season kicks off; sterling falls on rate cut fears; while inflation and retail sales data are the economic focus
Corporate news is the main focus this week as results for the fourth quarter of 2019 start to arrive on investors screens. Earnings season is always an important part of the market calendar but never more so than after a year in which shares have soared with almost no underlying support from higher profits.
Stock markets rose strongly in 2019 not because earnings rose but because investors were prepared to pay a higher multiple of those earnings in anticipation of a profits recovery in 2020. Investors will be looking for the first instalment of that in the results for the three months to December. Or at the very least, a stabilisation of results to set the scene for improving fortunes this year.
Goldman Sachs has estimated that more than 90% of the market’s appreciation last year was due to a rise in the average price-earnings multiple from 14 to 19. That return of risk appetite reflected optimism after the mid-year interest rate reductions from the Federal Reserve and an easing of trade tensions, with hopes rising that this week could see a signing of a preliminary agreement between China and the US.
As usual earnings season kicks off with a flurry of financial sector results, starting today with a trio of big banks. But attention will be on a handful of other high profile sectors as results come in over the next few weeks.
Consumer sectors will be in focus with last Friday’s non-farm payroll jobs data showing a cooling of the rate of improvement in employment. Fewer new jobs than expected were created in December although unemployment remains at a historically very low level. Earnings from the consumer discretionary sector are expected to have fallen by 14% in the fourth quarter, although strip out General Motors and Ford, which are struggling, and Amazon, which continues to invest in future growth rather than report profits today, and the decline is a more modest 3.5%.
Other sectors to keep an eye on include energy, which has been affected by the weakness in the oil price (at least until tensions in the Middle East saw the cost of crude rise in the early days of this year). Fourth quarter EPS are due to post a 37% decline as abundant supply from North American shale continues to swamp demand in a sluggish global economy. The hope is that earnings in this most cyclical of sectors will bounce back in 2020.
Technology will also be in focus as investors question whether the remarkable share price gains in the sector are justified by earnings which are forecast to grow by just 2pc in the three months to the end of 2019. In part that reflects heavy investment by tech companies last year and again the hope is that profits will rise pretty strongly in 2020 as spending falls away.
At the end of the year company bosses are expected to give some insight into what the coming year will look like. A year ago, the tone was super cautious as CEOs warned that the one-off tax boost that helped results in 2018 would not be repeated. This year, the expectation is that earnings will grow by more than 9% overall, which sets the bar rather higher. That could mean that investors’ tolerance of weaker than expected numbers is limited.
With valuations so much higher than they were 12 months ago, there is less room for investors to give businesses the benefit of the doubt, so post-results volatility could be higher in 2020.
On this side of the pond, results tend to be a bit slower to emerge. For now, the focus remains Christmas trading statements. As well as updates from the likes of Boohoo, Quiz and Whitbread,
retail sales data will give us a sense of how things are going. We’ve also got a couple of updates from the housebuilders, with Persimmon and Taylor Wimpey unveiling figures.
Yesterday’s news on the UK economy was pretty sobering, with GDP falling by 0.3% in November, worse than expectations for a broadly flat outcome. Previous figures for September and October were revised higher but overall in the three months to November, the economy only grew by 0.1% and by 0.9% in the year to November. That was the weakest growth rate for eight years.
Perhaps unsurprisingly in these circumstances, the pound has dipped this week below $1.30, well down on the $1.35 reached in the immediate aftermath of the general election before Christmas. The fall in sterling also reflected fears that the Bank of England may be poised to cut interest rates again to 0.5% as soon as this month.
Over the weekend, one member of the monetary policy committee, Gertjan Vlieghe, said that he needed to see an ‘imminent and significant improvement in the UK data’ to persuade him to vote for leaving interest rates at the current 0.75%. Outgoing Bank of England governor has also hinted this week that further easing may be on the way.
The poor economic news and fears over interest rates have poured cold water on hopes that Britain’s imminent departure from the EU at the end of the month can draw a line under the uncertainty that has dogged the UK economy since the Brexit vote in June 2016. Attention is now focused on the tricky trade negotiations that must be completed by September if an orderly departure from an 11 month implementation period is to happen by the end of the year, as promised by Prime Minister Boris Johnson.
On the broader global stage, the spotlight is on the planned signing of a trade deal between the US and China this week. Under the proposed deal, China will boost imports from the US and pledges to protect intellectual property rights. Meanwhile, the US has agreed to cancel new tariffs on $156bn of Chinese goods and to halve existing tariffs on a further $120bn of imports.
That should bolster confidence in a global economy that has been shaken in the early days of 2020 by an escalation of tit for tat violence in the Middle East.
Rising tensions in the Gulf, led initially to the usual cocktail of market responses: rising oil and gold prices and falling shares. These knee-jerk reactions were short-lived, however, as it rapidly became clear that neither the US nor Iran is interested in allowing the situation to deteriorate further. The oil price has anyway become significantly less dependent on the situation on the ground in the Middle East thanks to a huge increase in US oil production which has left the market much better supplied than in the past.
Perhaps the biggest market impact of the US-Iran stand-off was the investment of a record amount of cash in fixed-income funds last week as investors sought safe havens. Bond mutual funds and ETFs took in more than $23bn, the largest total since at least 2001, according to EPFR Global.