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Market Buzz | Spring 2019

Market Buzz

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First quarter earnings setback puts investors on watch

Investors and money managers are watching the stock market for signs of volatility related to companies slashing profit forecasts amid challenging market conditions, reported The Wall Street Journal April 8.

While the Federal Reserve’s decision to hold off on interest rate increases for the rest of 2019 has helped to temper investor skittishness, the WSJ report said that some investors were weighing corporate executives’ comments that might be evidence of a looming, late-cycle economic slowdown. The central bank’s decision early this year to avoid interest rate increases led investors to take on riskier assets. That exuberance pushed the S&P 500 to its best start to a year since 1998 — up more than 15% since January.

“Investors are rightly encouraged by the Fed’s reactions, but the Fed easing on policy isn’t going to alleviate margin pressures,”  said Mike Wilson, chief equity strategist at Morgan Stanley. “There’s a big risk to profit margins and quality of earnings we see this month and it’s definitely not priced into the market.“

For the first time since 2016, corporate profits experienced a first-quarter setback, potentially setting up the S&P 500 for an earnings recession, said the report.

Many corporations had set expectations high for year-over-year earnings growth in the wake of a boon in earnings fueled by Trump administration’s tax cuts. But analysts say S&P 500 profits were down by 4.2% from a year ago and forecast a no-growth second quarter.

Missed earnings forecasts tend to lead companies to economic growth-dampening cuts to capital improvements and labor, Mr. Wilson said in the report.

Another possibility is that the Fed could actually cut rates this year, according to Lew Piantedosi, who leads Eaton Vance’s growth-stocks team, a move that could keep investors preferring stocks over bonds. “Everything always starts with the Fed,” Mr. Piantedosi said.

Lower-fee social ETFs attracting investors

Lower fees are drawing investors to exchange-traded funds focusing on environmental, social and governance (ESG ETF) criteria, The Wall Street Journal reported April 8.

ESG ETFs have struggled to gain investors for years, the WSJ reported, but dropping U.S. asset-management industry fees are proving to be a boon for the funds and fees are falling faster among ESG ETFs than in other ETFs.

ESG ETF funds typically track indexes from MSCI and the 10 largest ESG ETF funds that avoid companies involved in weapons, tobacco and other such products. “We have invested a lot in modeling ESG data like carbon emissions,“ said Linda Eling-Lee, global head of ESG research at MSCI. “This is something that you need to develop an estimation for because not all companies are going to report on that.”

— Compiled by Jean Williams