June 8, 2018

Stocks opened mixed this morning (Dow & SPX flat) as the G-7 meeting got underway in Canada. Energy, telecom and tech sectors are leading to the downside. Consumer staples and healthcare are up modestly in early trading. Apple (AAPL) is down after another private research firm warned that the company is reducing order volume for iPhone components. I can’t believe after all these years we’re still falling for that one. The US dollar is a bit stronger today and commodities are understandably weaker. WTI crude oil is down .8% to trade around $65.40/barrel. Bonds are mostly unchanged today. The 5-year Treasury yield is hovering around 2.77% and the 10-year yield is currently at 2.93%. 

President Donald Trump entered the Group of Seven (G-7) summit with an unexpected tactic—complaining that Russia should be allowed to participate.  Russia, of course, was kicked out of the group after the country forcibly annexed Crimea in 2014. Before that, it was called the Group of Eight. Anyway, this may be a bid to distract the world from the meeting’s main focus this year—trade tensions between the US and Europe. Indeed, the president Tweeted that the meeting “will mostly center on the long time unfair trade practiced against the United States.” Mr. Trump plans to leave the summit early in order to attend another summit with North Korea hosted in Singapore. Stocks may feel more volatility around these events as traders try to take advantage of headlines. But this means very little to long-term investors. 

Liz-Ann Sonders, Chief Investment Strategist at Schwab, says the “liquidity tide is falling,” and this will be a headwind to the stock market going forward. What she means is that the Federal Reserve is on a path to tighten monetary policy (or raise interest rates gradually), and rising rates usually act as a suppressor of stock valuations. So her message is that we shouldn’t expect stock market P/E ratios to expand as they have since 2011. Rather, the thing that will continue to drive the stock rally has to be earnings growth. Stock prices will rely on Corporate America’s ability to grow profits. That’s as it should be; we can’t always rely on monetary and fiscal stimulus. And it so happens that corporate earnings are doing just fine. In the first quarter of this year, aggregate earnings of S&P 500 companies rose over 20% from year-ago levels. That’s too high to be sustainable, of course, but investors are looking intently into prospects for earnings growth in 2019 and beyond to see if 12-14% growth is reasonable to expect. 

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