On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben discussed the latest Brexit developments, the slowdown in the Chinese economy and the outlook for third-quarter earnings season in the U.S.
Johnson, EU reach agreement on Brexit
UK Prime Minister Boris Johnson successfully negotiated a draft divorce agreement with the European Union (EU) on Oct. 17, setting up a critical vote in Parliament on Oct. 19. The agreement with the EU effectively allows UK member Northern Ireland to stay in a common customs union and prevents a hard border with the Republic of Ireland, an EU member.
“This is the deal that I think most people wanted, but unfortunately, it doesn’t seem to be the deal that the Democratic Unionist Party (DUP) of Northern Ireland wanted,” Ristuben said. He explained that the DUP, which has come out against the deal, has 10 members of parliament (MPs)—and that those 10 members are why Johnson was elected prime minister in the first place, as his Conservative party lacks a majority. In order for Johnson to make up for these lost votes, he’ll need to attract the support of 19 Labour Party MPs to get his deal approved, Ristuben added.
How it all shakes out is anyone’s guess, he said, but one thing appears clear: After three years, the broader marketplace is likely experiencing some Brexit fatigue. As evidence, Ristuben noted that when the deal was announced on Oct. 17, global equity markets had little to no reaction.
What’s behind the growth slowdown in China?
Switching to China, Ristuben said that the country logged a 6% GDP (gross domestic product) growth rate during the third quarter—at the low end of the Chinese government’s targeted growth rate of 6.0% to 6.5%, and also the lowest growth rate reported since 1992. The report, released Oct. 19 by China’s National Bureau of Statistics, is a recognition by the government that economic growth is slowing, Ristuben observed.
There are two elements to the slowdown, he said: Investment and consumption. “While state-owned and state-run businesses in China are continuing to invest, it’s very clear that non-Chinese foreign firms are beginning to divest from China,” Ristuben remarked. Consumer spending—particularly in relation to automobile purchases—has also softened recently, he noted, due to a weakness in the country’s housing market. Overall, this slowdown is probably creating some motivation for Chinese President Xi Jinping to strike a trade deal with U.S. President Donald Trump, Ristuben said.
Outlook for Q3 earnings season
Turning to earnings season, Ristuben said that third-quarter earnings for S&P 500 companies are projected to decline -4.6% on a year-over-year basis. However, he noted that earnings from the first two quarters of the year beat consensus expectations. “If the third quarter follows suit, growth will likely end up better than expected: either flat or slightly negative,” Ristuben stated. If growth does end up negative, it would make for the third consecutive quarter of declining earnings, he added.
With the season still in its early stages, Ristuben said there’s been mixed results among the banks that have reported, with some beating expectations. He noted this is likely due in part to a reduction in interest rates during the third quarter, which spurred a rebound in the U.S. housing market. Overall, however, the general tone emerging from the banking sector is less optimistic than at the start of the year, Ristuben stated.
“It’s important to understand that this doesn’t mean banks have turned pessimistic,” he explained. “Rather, I think banks are recognizing the detrimental impacts that trade tensions are having on the manufacturing sector—and are therefore beginning to become more concerned about these impacts potentially spreading to the consumer spending market,” Ristuben concluded.
Disclosures These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Disclosures These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Investing involves risk and principal loss is possible.
Past performance does not guarantee future performance.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.
Indexes are unmanaged and cannot be invested in directly.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
CORP-11552
Disclaimer: Opinions expressed by readers don’t necessarily represent Russell’s views. Links to external web sites may contain information concerning investments other than those offered by Russell Investments, its affiliates or subsidiaries. Neither Russell Investments nor its affiliates are responsible for investment decisions with respect to such investments or for the accuracy or completeness of information about such investments. Descriptions of, references to, or links to products or publications within any linked web site does not imply endorsement of that product or publication by Russell Investments. Any opinions or recommendations expressed are solely those of the independent providers and are not the opinions or recommendations of Russell Investments, which is not responsible for any inaccuracies or errors.
Investing in capital markets involves risk, principal loss is possible. There is no guarantee the stated outcomes in the presentation will be met.
This is a publication of Russell Investments. Nothing in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The contents in this publication are intended for general information purposes only and should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional concerning your own situation and any specific investment questions you may have.
Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.