“Blown Earnings Calls Started the Bull Market. One Day They’ll End It.”
As the U.S. equity bull market heads into its 10th year with earnings underpinning the case for buying, consider this: at the most important turning points for stocks in the past decade, profit projections have been laughably wrong.
Take the start of this bull market, nine years ago today. Banks were failing, the economy was shrinking, and stocks had just suffered their worst year in seven decades. Equity forecasters were appropriately grim, predicting a double-digit decline in corporate income that would’ve ranked among the worst ever seen. Instead, earnings rose.
Step back a bit further to October 2007, when shares had gained for five straight years. Analysts were projecting a solid increase in S&P 500 Index profits for the fateful year of 2008. They were off by 41 percentage points.
Of course, estimates aren’t always that wrong. But assuming they’re reliable isn’t a safe bet, either. It’s a point worth heeding now because Donald Trump’s tax cuts and an uptick in global growth have analysts boosting earnings estimates at the fastest pace on record. And that profit backdrop has been repeatedly cited by strategists from JPMorgan Chase & Co.’s Dubravko Lakos-Bujas to Jonathan Golub at Credit Suisse Group AG as reason to buy the dip.
Last month’s correction, the biggest in two years, occurred side by side with the unprecedented stretch of analyst upgrades. Volatility is returning after a torpid 2017 as Trump, whose $1.5 trillion tax overhaul was greeted with record equity inflows in January, turns toward a protectionist stance on trade. The Federal Reserve, cheerleader of gains that have added $22 trillion to American equity values since 2009, is becoming a less reliable ally too.
“Long sought by North Korea, summit holds risks for Trump administration.”
For at least two decades, leaders in North Korea have been seeking a personal meeting with an American president. Now, as a summit unexpectedly appears possible, analysts fear U.S. President Donald Trump’s understaffed administration may lack the expertise to successfully turn a political spectacle long sought by Pyongyang into a meaningful opportunity to convince North Korea to abandon its nuclear program.
South Korean officials said Friday Trump almost immediately agreed to meet North Korean leader Kim Jong Un, without preconditions, by the end of May. Even proponents of a diplomatic approach towards North Korea worry the administration could be rushing into a summit with little time to prepare.
Secretary of State Rex Tillerson has often been publicly contradicted by the White House over North Korea, including on Thursday when just hours before the announcement of a summit he said “we are a long ways from negotiations”. Several experienced career diplomats occupy key positions in the Trump administration’s Korea and East Asia offices, but many of them are in an acting capacity while other positions are entirely empty. Joseph Yun, the U.S. envoy in charge of negotiating with North Korea, quit last week, and Trump has yet to nominate an ambassador to South Korea.
“A summit is a reward to North Korea,” said Robert Kelly, a professor at South Korea’s Pusan National University. “It extends the prestige of meeting the head of state of the world’s strongest power and leading democracy. That is why we should not do it unless we get a meaningful concession from North Korea. That is why other presidents have not done it.” If the summit fails, the cost could be higher than in the past, observers noted, with North Korea firmly in possession of a nuclear arsenal and Trump having said military strikes may be needed to remove those weapons.
“Catalonia Spain: Judge refuses to release Jordi Sanchez for investiture.”
Spain’s Supreme Court says the man nominated to lead Catalonia’s regional government cannot be freed from jail to attend an investiture ceremony. Pro-independence activist Jordi Sanchez, 53, had asked to be released to attend Monday’s debate and vote in the Catalan parliament. He was jailed on sedition charges after October’s independence referendum, which was deemed illegal by Spain. The judge said there was a risk Mr Sanchez would reoffend.
Mr Sanchez was nominated as Catalonia’s leader by separatist parties after the former head, Carles Puigdemont, last week formally abandoned his attempt to be reappointed. He has backed Mr Sanchez, who is the only candidate.
Mr Puigdemont fled to Belgium after the referendum to avoid detention. He remains there, fearing arrest if he returns. The separatist parties won a slim majority in regional elections in December.
Those elections had been called by the central government after it sacked the regional administration and imposed direct rule when the independence referendum was declared illegal.
Judge Pablo Llarena ruled on Friday that although Mr Sanchez had the right to participate in public affairs, those rights could be curtailed if there was a risk of reoffending.
The central government has vowed to oppose any attempt by Catalonia to break away and has told its parties to choose a leader who is not in jail.
Twenty-eight Catalan politicians are being investigated by a Supreme Court judge for their role in the referendum and a subsequent declaration of independence. Mr Sanchez and three others remain in jail: former vice-president Oriol Junqueras, Catalan ex-Interior Minister Joaquim Forn and grassroots separatist leader Jordi Cuixart. This is Spain’s biggest political crisis since democracy was restored to the country in 1975.
“U.S. economy adds 313,000 jobs in February; wage growth slows.”
U.S. job growth surged in February, recording its biggest increase in more than 1-1/2 years, but a slowdown in wage gains pointed to only a gradual increase in inflation this year. The increase in payrolls last month was the biggest since July 2016 and was triple the roughly 100,000 jobs per month the economy needs to create to keep up with growth in the working-age population.
Average hourly earnings edged up four cents, or 0.1 percent, to $26.75 in February, a slowdown from the 0.3 percent rise in January. That lowered the year-on-year increase in average hourly earnings to 2.6 percent from 2.8 percent in January.
The unemployment rate was unchanged at a 17-year low of 4.1 percent in February for a fifth straight month as 806,000 people entered the labor force in a sign of confidence in the job market. The average workweek rebounded to 34.5 hours after falling to 34.4 hours in January.
With Federal Reserve officials considering the labor market to be near or a little beyond full employment, the moderation in wage growth last month will probably do little to change expectations the U.S. central bank will raise interest rates at its March 20-21 policy meeting.
Speculation that the central bank would upgrade its interest rate projections was stoked by Fed Chairman Jerome Powell when he told lawmakers last week that “my personal outlook for the economy has strengthened since December.” While Powell said there was no evidence of the economy overheating, he added “the thing we don’t want to have happen is to get behind the curve.”
Economists polled by Reuters had forecast payrolls rising by 200,000 jobs last month and the unemployment rate falling to 4.0 percent. Average hourly earnings had been expected to increase 0.2 percent in February. Data for December and January was revised to show the economy adding 54,000 more jobs than previously reported.