Can US Companies Weather a Global Slowdown?

  Today Month Ago Year Ago
  11-Apr-16 11-Mar-16 11-Apr-15
S&P TSX 13,422 13,284 15,383
S&P 500 2,041 2,055 2,092
DJIA 17,356 17,652 18,036
OIL $40.37 $29.02  $68.86
USD vs CAD 0.7755 0.7658 0.8503
Gold $1,258 $1,239  $1,174


Since the beginning of 2016, economists have expressed their pessimistic opinions about the global economies. The US Federal reserve raised their benchmark interest rates in December 2015 for the first time in a decade with a view that the US economy is growing and strong enough to sustain gradual rate hikes during 2016. Since the rate hike, US indices have not performed well and have been flat. Economists and financial commentators are continuously questioning Janet Yellen’s decision to raise interest rates and do not believe that the US economy is ready for another hike in interest rates. According to CME Fed Watch tool, probability of another rate hike in December 2016 is now only 59%.  While the US economy is not performing reasonably well, weakness across European and Asian nations definitely hurts US multinational corporations. At a time when many European nations are facing record unemployment and weak economic growth, European Central Bank has opted for negative interest rates to revive their economic growth rates. Until February, more than $7 trillion of Government bonds worldwide offered negative yields, which means that any investor that bought these bonds and holds them till maturity won’t get all his or her money back. Recent research by Factset showed that companies with more than 50% of their sales within US had positive earnings growth rate but on the contrary, companies with more than 50% of their sales outside US had a decline in their earnings. A strong US dollar and lower energy prices are the main contributors for this decline in corporate profitability. Companies with majority of their sales outside the US had to face losses in foreign exchange, which lowered their profitability. The US Dollar index has increased by more than 20% against a basket of 9 currencies since 2013. Many companies have started to report their earnings for Q1 2016 and so far 22 companies in the S&P 500 have already reported their earnings.  As of today, the estimated earnings growth rate for Q1 2016 is -9.1%, compared with a growth rate of 0.7% for the last quarter (on December 31, 2015). If the index reports a decline in earnings, it will be the first time that the S&P 500 has seen four consecutive quarters of year-over-year earnings decline since December 2008.

While companies’ profitability and indices should move in the same direction, history does not show any such relation. The image below indicates that from 2000- 2009, annual profit for companies grew by 10.3% but the annual stock market returns for that decade were -1%. Conversely, from 2010- 2015 the annual profit for companies grew by 1.5% but the annual stock market returns were 12.8%. Investors should still conduct more research (macro and micro economic) and talk to their financial advisors before drawing any conclusions between earnings growth rate and index movements.


Disappointing Jobs report for the US? Not Really!

   Schwaben Blog

February 05, 2016



Weekly Statistics:

  Today Week Ago Year Ago
  05-Feb-16 29-Jan-16 05-Feb-15
S&P TSX 12,763 12,822 14,384
S&P 500 1,880 1,940 2,044
DJIA 16,205 16,466 17,780
OIL $31.00 $33.20  $68.86
USD vs CAD 0.7202 0.7112 0.8503
Gold $1,174 $1,121  $1,174


Another volatile week for US equities ended with S&P 500 losing more than 3% for the week. The disappointing jobs report released on Friday brought further negative momentum to already fragile markets. But a detailed look into that report brings out some positive takeaways. The jobless rate dropped to 4.9%, matching the Fed’s median forecast for the long-run sustainable level of unemployment or “full employment”, and continuing the most impressive trend in U.S. economic data. It is the first time since February 2008 that the unemployment rate has dropped below 5%.  The hourly wages also rose by 0.5% in January, the largest increase since January 2015 and beating market expectations by 0.3%. The gain in hourly wages will certainly help the US economy move closer to their inflation target of 2%.  The US economy is 70% consumption driven and with extra savings from lower oil prices, consumers will eventually put more money into the economy. So far we have not seen a substantial improvement in consumer spending but as Deutsche Bank recently said in its research report “Lower oil has an immediate impact on energy sector and the positive effects on the economy usually appear with a lag”. Another explanation for lower consumer spending could be that consumers are paying down their debts instead of spending. According to a Morgan Stanley report, consumer balance sheets are in great shape, with the lowest debt-to-disposable income ratio since 2003. As far as earnings recession goes, if we strip out the energy companies from the S&P 500, the blended earnings will improve from -3.8% to 2.2%. This shows that except the energy companies, the US corporations are doing well and are financially stable.

Oil Prices and the US Equities!!

   Schwaben Blog

January 29, 2016



Weekly Statistics:

  Today Week Ago Year Ago
  29-Jan-16 22-Jan-16 29-Jan-15
S&P TSX 12,822 12,389 14,384
S&P 500 1,940 1,906 2,044
DJIA 16,466 16,093 17,780
OIL $33.20 $32.25  $68.86
USD vs CAD 0.7112 0.7081 0.8503
Gold $1,121 $1,098  $1,174


US stocks closed sharply higher on Friday, booking a second straight weekly gain but posting the worst January performance since 2009. The main driver for Friday’s rally was a surprise decision by the Bank of Japan to push a key interest rate into negative territory that could also push the Federal Reserve to ease up on its plans to steadily raise interest rates. Even after this rally, major indices have still lost more than 5% in January. St. Louis Fed President James Bullard recently mentioned that the continuing plunge in oil prices could impact the U.S. central bank’s decision-making process. Oil prices have lost nearly 18 percent in January, and causing worries that the global economy will enter a prolonged slowdown. As of Friday, 40% of the companies in the S&P 500 have reported their Q4 2015 earnings and 72% of those have reported above their mean estimates. For Q4 2015, the blended earnings decline is -5.8% and if the index reports a decline in earnings for Q4, it will mark the first time the index has seen three consecutive quarters of year-over-year declines in earnings since 2009. Out of the 10 sectors in S&P 500, four sectors are reporting year-over-year growth in earnings, led by the Telecom Services and Information Technology sectors, and six sectors are reporting a year-over-year decline in earnings, led by the Energy and Materials sectors. The blended earnings decline for Q4 2015 is -5.8%; excluding the Energy sector, the blended earnings decline for the S&P 500 would improve to positive earnings growth of 0.5% from a decline of 5.8%, a clear indication of the magnitude that the decline in oil prices has had on the indices.

The Good, the Bad and the Ugly of the Fed rate hike!!

   Schwaben Blog

December 18, 2015



Weekly Statistics:

  Today Week Ago Year Ago
  18-Dec-15 11-Dec-15 18-Dec-14
S&P TSX 13,024 12,742 15,417
S&P 500 2,006 2,017 2,089
DJIA 17,129 17,266 17,819
OIL $34.55 $35.56 $68.86
USD vs CAD 0.7165 0.7278 0.8503
Gold $1,066 $1,078 $1,174


The Federal Reserve raised interest rates for the first time in a decade, pointing towards a healthier and a stronger US economy. The board members of the Federal Open Market Committee (FOMC) voted unanimously for this rate hike. The U.S. central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs. Many economists see this rate hike as a vote of confidence in the US economy. The central bank clarified that the rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move it would give more importance on monitoring inflation, which remains well below the Fed’s target rate of 2%. A Dec. 9 Reuters poll showed economists forecasting the federal funds rate to be 1.0 percent to 1.25 percent by the end of 2016 and 2.25 percent by the end of 2017. Equity markets applauded the rate hike and rose sharply on Wednesday after the announcement, but markets lost their gains and fell subsequently on Thursday and Friday. The main reasons for the subsequent drop in equity markets are the rising US dollar and falling oil prices falling $35 per barrel (first time in last seven years). Today is a big options expiry day- a day when futures and options contracts expire- which is likely adding to volatility. The chart below depicts the US Fed funds rate, which peaked at 5.25% in 2006 and stayed at almost 0% since 2009.


Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

“That’ll be the day … “when the Fed hikes the rate … It could be in December !

   Schwaben Blog

November 20, 2015 

Weekly Statistics:

  Today Week Ago Year Ago
  20-Nov-15 13-Nov-15 20-Nov-14
S&P TSX 13,433 13,075 15,111
S&P 500 2,089 2,023 2,052
DJIA 17,824 17,245 17,719
OIL $39.39 $40.73  $75.86
USD vs CAD 0.7493 0.7507 0.8903
Gold $1,077 $1,083  $1,194


As more members of the Federal Reserve are starting to point towards a rate hike in December, market participants become more optimistic about the health of the US economy. In the past, investors did not respond well to the possibility of a rate hike due to higher business borrowing costs. Investors recently shifted their perspectives due to strong economic indicators. Investors are more confident that the US economy is strong enough to sustain an interest rate hike. Minutes from the October meeting of Federal Reserve officials supported the idea that rate hikes will be very gradual. This improved the sentiment of equity markets.  The Dow Jones, S&P and the TSX recorded gains of 3.4%, 3.3% and 2.8% respectively. S&P 500 recorded its best week in six weeks and the DJIA climbed back into the positive year-to-date territory. One of the major reasons why the Fed has not yet raised interest rates likely is lower inflation. However, recently St Louis Fed President James Bullard said that the rate of inflation will soon rise towards the Fed’s 2% annual target. This reduces concerns that stagnant inflation could dissuade policymakers from raising rates. Many members of the Federal Open Market Committee (FOMC) are in the favor of a rate hike at the December meeting. The image below is of the CME FedWatch Tool, which shows the probability of an interest rate hike of 74% probability at the December meeting, up from 70% the previous week. Further, should interest rates increase; there is a 73.6% probability of a 50 basis points hike and 26.4% probability of a 25 basis points hike.

The Effect of US Dollar on Equities

   Schwaben Blog

November 13, 2015

Weekly Statistics:

Today Week Ago Year Ago
13-Nov-15 06-Nov-15 13-Nov-14
S&P TSX 13,075 13,553 14,843
S&P 500 2,023 2,033 2,039
DJIA 17,245 17,910 17,652
OIL $40.73 $44.52  $75.01
USD vs CAD 0.7507 0.7537 0.8827
Gold $1,083 $1,088  $1,165

In the S&P 500, 444 companies have reported their earnings for Q3 2015 until last week. 74% of those companies have reported earnings above the mean estimate and 46% have reported sales above the mean estimate. The blended earnings decline for Q3 2015 is -2.2%, compared with earnings expectations of -5.2% on September 30, 2015. This will mark the first back to back quarters of earnings decline since 2009 if the index reports a decline in earnings for Q3. It will be almost certain that the overall earnings will be negative unless the remaining 56 companies report stellar results. The blended sales growth is -3.7%. Two main factors responsible for decline in earnings and sales across the index are strong  US dollar and a struggling Energy sector. The Energy sector was the largest contributor to the year-over-year declines in both earnings and revenues for the index. The blended earnings growth rate for the S&P 500 (ex-Energy) for Q3 is 4.5%. Hence Energy has contributed -6.7% to earnings this far. The other factor for decline in earnings and sales is strong USD. A recent analysis by Factset to quantify the effect of strong USD on S&P 500 companies found that companies that generate more than 50% of sales inside the US had a blended earnings growth rate of 4.8% but for companies that generated less than 50% of the sales inside the US, the blended earnings growth is -10.6%. The results were similar for the blended sales growth rate. This is a sign of the worsening effect that a strong USD has on the US conglomerates. After last week’s astounding payroll report, analysts and economists have become overly confident of a rate hike in December. According to CME FedWatch tool, there is a 70 % probability of a rate hike during FOMC meeting in December. Should interest rates increase, then there is a 69.8% probability of a 50 basis points hike and 30% probability of a 25 basis points hike.  The high likelihood of a rate hike led to  sharp decline across all major indices this past week. A rate hike in the US would lead to a stronger US$, the greater the rate hike the more the US$ would strengthen. The graph below compares the change in price of the S&P 500 with the change in Forward 12 month Earnings per share for the index.

Are we in for a rate hike in December?

   Schwaben Blog

November 06, 2015

Weekly Statistics:

Today Week Ago Year Ago
06-Nov-15 30-Oct-15 07-Nov-14
S&P TSX 13,553 13,525 14,690
S&P 500 2,033 2,079 2,031
DJIA 17,910 17,662 17,573
OIL $44.52 $46.59  $78.61
USD vs CAD 0.7537 0.7650 0.8827
Gold $1,088 $1,141  $1,146

With the release of October Payroll report the fear of an interest rate hike as soon as December is back on the table. After last week’s report that the US economy posted a disappointing growth of just 1.5 percent (annualized) in Q3 2015, investors discounted the probability of a rate hike anytime soon and started getting back into equities. But today’s jobs report left little doubt that the US economy is growing again. The gain of 271,000 in payrolls was the biggest this year and exceeded analysts’ expectations of a gain of 185,000. After almost eight years, the US economy now has more civilians working in full-time jobs than it had before the financial crisis of 2007/08. According to CME FedWatch tool, there is a 70 % probability of a rate hike during FOMC meeting in December. Also, if the interest rates are increased, then there is a 69.8% probability of a 50 basis points hike and 30% probability of a 25 basis points hike. Last week, the probability of just a rate hike was less than 30%. I still think that the likelihood of an increase in interest rates is around 30-40%.  Even though employment numbers have far exceeded the expectations, the average blended earnings growth for S&P 500 is -2.2%. If the index reports an earnings decline in Q3, it will be the first back-to-back quarters of earnings declines since 2009. According to Factset, 76% of companies are reporting EPS above estimates. This is above the 5 year average earning surprise for the index, while only 47% of the companies are reporting sales above estimates. With interest rates at record lows, companies are buying back their shares at a record pace and this raises EPS. The share buyback increases EPS however it may not be a sign of significantly increased earnings. Although employment gains last month were a lot stronger than expected it may not necessarily point to an excessively growing US economy.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

The US Economy Slowing Down?

   Schwaben Blog

October 02, 2015

Weekly Statistics:

Today Week Ago Year Ago
02-Oct-15 25-Sep-15 02-Oct-14
S&P TSX 13,340 13,380 15,026
S&P 500 1,951 1,931 1,965
DJIA 16,472 16,315 16,945
OIL $45.63 $45.58  $89.37
USD vs CAD 0.7507 0.7507 0.9051
Gold $1,137 $1,146  $1,226

With only two weeks left for the October FOMC meeting, it certainly doesn’t look like a rate hike is on the Fed’s agenda. The disappointing unemployment report for the US economy justifies the Fed’s decision to not to raise the interest rates during their last meeting. In September, the US economy added a seasonally adjusted 142,00 jobs compared with analysts’ expectation for a gain of 200,000 jobs. This is the second month of disappointing unemployment numbers, after the US economy added only 136,000 jobs in august compared with analysts’ expectation of 173,000. A significant correction in oil prices during last one year has led to mounting losses/ bankruptcies for many energy companies and they have cut 120,000 positions since December 2014. The longer the oil prices stay low, the deeper the losses for energy companies, and therefore more layoffs. These layoffs could be one of the reason for disappointing unemployment numbers since last two months. After deciding to keep interest rates steady during the last meeting in September, the Federal reserve chairperson, Janet Yellen, commented that most members on Federal Open Market Committee (FOMC) still expect a rate increase in 2015, but I believe that a rate hike in the first quarter of 2016 would be more prosperous for the US economy. The poor unemployment numbers in the last two months could also mean the economy did not grow at a decent pace in the third quarter. At a time when global economies were slowing down, the US economy grew at 3.9 percent in the second quarter and a dismal performance in the third quarter   would cast serious doubts over the strength of the economy.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading EconomicsUS Jobless Sep 2015

The US Dollar and The Interest Rates

   Schwaben Blog

September 25, 2015

Weekly Statistics:

Today Week Ago Year Ago
25-Sep-15 18-Sep-15 25-Sep-14
S&P TSX 13,380 13,646 15,026
S&P 500 1,931 1,958 1,965
DJIA 16,315 16,385 16,945
OIL $45.58 $44.92  $89.37
USD vs CAD 0.7507 0.7604 0.9051
Gold $1,146 $1,138  $1,226

After deciding to keep interest rates steady during the last meeting, the Federal reserve chairperson, Janet Yellen, commented yesterday that most members on Federal Open Market Committee (FOMC) still expect a rate increase in 2015. She also said that “Prospects for the US economy generally appear solid”. Her comments are supported by this morning’s report from the Commerce department, which states that the US economy grew at an annual rate of 3.9 percent compared to the previous forecast of 3.7 percent. A significant correction in oil prices could also be partially responsible for this stellar growth. This boosted the confidence of investors after the last FOMC meeting gave them some jitters about the growth of the US economy. Most of the major economic indicators are pointing towards a healthy and growing economy, and raising interest rates by 25bps would not prove catastrophic. Although there could  be a short-term correction in equity markets, a hike in interest rates would  signal that the US economy is strong enough to absorb a rate hike after almost a decade, however this does not alleviate the concern of falling inflation especially with a rise in interest rates. A stronger dollar could also  lower inflation as it suppresses import prices. The US dollar index, which measures the performance of US dollar against a basket of six currencies, has significantly appreciated on a year-over-year basis and is almost at the highest level for a decade resulting in disinflation for US consumers.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

US unemployment at record low – where is inflation ?

Schwaben small S    Schwaben Blog


May 24, 2015


Weekly Statistics:



Week Ago

Year Ago









S&P 500





















The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in 41 years, pointing towards a strengthening US job market. Initial claims for unemployment benefits dropped 26,000 to 255,000 (seasonally adjusted) for the week ended July 18. Initial jobless claims have an importance in financial markets because unlike continued claims data which measures the number of persons claiming unemployment benefits, initial jobless claims measures new and emerging unemployment. As it is evident from the chart below, the data could be volatile but the latest numbers are at historic lows. The four-week moving average of claims, considered a better measure of labor market trends as it excludes the week-to-week volatility , fell 4,000 last week to 278,500. A number below 300,000 is usually considered a threshold associated with strengthening labor market and the jobless claims have stayed below 300,000 for 17 straight weeks. Persistently low layoffs and greater employment gains will help wage gains and likely support consumer spending. At this point the Federal Reserve is still assessing the health of the US economy before deciding when to raise the interest rates. Unemployment numbers and jobless claims play a key factors in the Fed’s decision making process. The Federal Reserve may raise the interest rates in September should employment continue to strengthen and there are signs of wage gains.  This could possibly bring a small correction in equity prices over the short term.

united-states-jobless-claims July 24 2015

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics