A little less than a month ago, investors were convinced that a recession was coming. Plenty of analysts, economists, and politicians parroted that sentiment.
Then, two weeks ago, things started to change when JP Morgan Chase and Co (NYSE: JPM) kicked off earnings season. The company beat EPS (earnings per share) estimates handily, and even upgraded its outlook for the next year. CEO Jamie Dimon said that American consumers were stronger than ever. More importantly, he commented that his company should continue to perform well despite rock-bottom rates – a condition that the banking industry almost unilaterally feared.
Over the next week, more corporations fell in behind JPM. By week’s end, 80% of the reporting S&P 500 companies surpassed analyst expectations.
Then, last Friday, “celebrity” analysts started to turn as well. Emerging markets legend Mark Mobius – famous for managing $50 billion in emerging markets portfolios at Franklin Templeton – said that a recession seemed highly unlikely, as he believes that Trump will win easily in 2020. With “The Donald” in the Oval Office, Mobius thinks corporations can finally relax.
Especially if Trump ends the trade war, which Mobius expects to happen next year.
So today, it’s no surprise that the S&P 500 hit a new all-time high. Bullish sentiment ran rampant this morning (as it should). Buoyed by strong earnings and trade war optimism, investors have plenty of reasons to feel confident about the future.
And it’s all thanks to the real driver of global growth:
The American consumer. Or, more specifically, how strong consumers appear to be.
It’s something that scores of corporations (not just JP Morgan) are acknowledging.
“I think the U.S. economy and the U.S. consumer is in pretty good shape,” said Capital One (NYSE: COF) CEO Richard Fairbank.
“Consumers are obviously benefiting from a strong labor market, rising wages, and last year’s tax cuts, all of which are driving up disposable incomes.”
Other leaders from the credit card industry feel the same way, like Visa (NYSE: V) Vice Chairman Vasant Prabhu.
“From the numbers we reported for the last two quarters, you can see that growth trends of all our key business drivers, payments volumes, processed transaction, and cross-border volume have been stable […] Our outlook assumes that the trend have been in place for the past couple of quarters, continue through fiscal year 2020,” Prabhu said.
Even homebuilders are feeling the love.
“I know there is a lot of questions about upcoming potential recession and things like that. Our customers don’t seem to be viewing it that way. And I think that the housing market, in general, seems solid and strong and continuing to improve,” remarked Lennar (NYSE: LEN) CEO Stuart Miller.
Now, that’s not to say that everyone is on board with the bullish shift. As is typical, some companies fell short of analyst estimates last quarter. Most of them saw poor revenues as evidence of a slowdown, and a few are preparing for a worse-than-expected Q4.
“We’ve seen a slowdown start in the second quarter and continue to the third quarter, and likely will continue for at least a portion of the fourth quarter,” said Donald Allan, CEO of Stanley Black & Decker (NYSE: SWK).
However, that kind of guidance has been few and far between. Illinois Tool Works (NYSE: ITW), a company that experienced Q3 struggles, still expects a positive Q4.
“We did see a modest slowdown, particularly on the CAPEX side here in Q3,” said ITW’s CEO Michael Larsen.
“When we look at the underlying activity in these businesses and the order rates, they’re actually looking pretty good heading into Q4. […] The remaining segments are pretty stable.”
And though it might be easy to get caught up in the “no recession” excitement, there still may be reason to remain cautious.
Because if the ongoing trade talks fail (again), the market could easily retrace its October gains. Don’t forget; we’ve been through this before – the U.S. and China have made “micro agreements” time and time again, only for things to get worse.
The most recent (partial) trade deal hasn’t even been finalized yet. Until the Chinese Communist Party signs the dotted line, it might make sense to keep the champagne on ice.
“Popping the cork” too soon could lead to significant losses down the road. On the other hand, if the U.S. economy keeps showing signs of strength, it might end up reaching “exit velocity”, meaning that even another trade war setback wouldn’t derail the next bull run.
Provided, of course, that Trump continues to lead the 2020 polls – something that the corporations need to see if they’re going to chase aggressive growth.
