The U.S. stock market has seen its share of volatility in 2019. Despite the rollercoaster ride, this year’s performance has fared much better than 2018, when the Dow Jones Industrial Average (DJIA) lost 5.6%. As of Thursday’s close, the DJIA is up 13.1% so far this year.
Much of this gain occurred in June, when the DJIA increased 7.2% — its strongest June performance in 81 years. The stock market rally continued into July, fueled by the latest corporate earnings season. Corporate earnings season is the roughly six-week time period when U.S. corporations announce their quarterly financial results — in this case, the April-June second quarter.
With 444 (89%) of companies in the S&P 500 having reported their quarterly results, 73% have reported earnings (profits) above expectations. The S&P 500 is the benchmark stock index comprised of the 500 largest U.S. corporations. Collectively, corporate earnings have grown by 2.8% and revenues have increased 4.7% from the second quarter of 2018. This far exceeds the 0.3% and 3.6% growth rates for earnings and revenues, respectively, that were projected back in April. Of the 11 sectors that make up the U.S. economy, the top five for earnings growth are Communications Services (16.7%), Health Care (10%), Financials (10%), Real Estate (4.1%) and Utilities (1.2%).
But 2019’s stock market rally has come to a grinding halt with the recent escalation in the U.S.-China trade dispute. On Thursday, Aug. 1, President Trump imposed a 10% tariff on an additional $300 billion of Chinese goods. This is on top of the 25% tariff on $250 billion of Chinese goods that currently exists. Thus, this latest escalation means all Chinese goods imported into the U.S. would be subject to some form of a tariff. Four days later, on Monday, China retaliated by devaluing its national currency — the Chinese yuan — that sent the value of the yuan plummeting to an 11-year low.
International rules and treaties prohibit a nation from unfairly manipulating the value of its currency. The value of one nation’s currency relative to others must be based on the global forces of supply and demand. But when a nation devalues its currency, as with China, it artificially lowers its value relative to other global currencies. This devaluation suddenly makes China’s goods cheaper to buy in the global marketplace. Consequently, China’s currency manipulation acts to the detriment of American manufacturers — a point of contention Trump has repeatedly made.
After the dust settled on this latest escalation, the DJIA had fallen 1,146 points (4.3%) in just three days — including Monday’s 767-point pummeling. The market’s concern now lies in the projected duration of this trade dispute, which is in its second year. Hopes were high the goodwill created by Trump and Chinese President Xi Jinping at the June G20 Summit in Japan could lead to a final resolution by the end of the summer or fall. But this current flair-up has effectively dashed any expectations of a quick closure.
Unfortunately, a better-than-expected second-quarter earnings season has been relegated to the sidelines of market attention. Instead, the greater focus is on the risk this trade dispute could now continue well into 2020.