by Connor Darrell CFA, Assistant Vice President – Head of Investments
After a brief bump following the mid-term elections, markets have struggled to maintain their footing over the past couple of weeks. That trend continued last week with the S&P 500 sliding down 1.54%. International developed markets followed suit, although the much-maligned emerging markets equity index managed a positive gain. The bond market benefitted from the volatility in equity markets as well as some dovish comments from Atlanta Fed President Raphael Bostic (a member of the interest rate setting FOMC chaired by Jerome Powell), who stated at a conference in Madrid that he does not think “we are too far from a neutral policy.” The comment suggested that fewer rate hikes may be necessary and was somewhat contradictory to the statement Jerome Powell made back in October that prompted a surge in bond yields. Ultimately, investors should continue to expect that the Federal Reserve will remain “data dependent” and will be very clear in communicating its intentions to markets.

Corporate Earnings Have Been Strong, But May be Poised to Taper Off
On a year-over-year basis, Q3 earnings growth among S&P 500 companies is poised to reach its highest level since 2010. About half of that growth can be credited to tax reform, which decreased the tax burden on corporations and enabled them to report higher profits, but the other major contributing factor has been the strength of the U.S. consumer. However, despite the robust earnings growth that has been reported by U.S. companies, the equity market has failed to push meaningfully higher in 2018. This can be partially explained by the tendency for markets to be more concerned with the future rate of change of earnings, rather than the absolute numbers themselves. As the year-over-year benefits of tax reform disappear in Q1 of next year, consumers will take on the bulk of the burden in carrying earnings growth forward, and the bottom line is that earnings growth is likely to decelerate. The uncertainty surrounding how much earnings may decelerate is likely a contributing factor to some of the volatility we are observing in equity markets. We continue to believe that the economic environment is conducive to further gains, but caution that returns moving forward will be far less exciting than what investors have experienced over the past several years.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Aside from a few “upsets” in individual races, there were no major surprises in the results of the U.S. midterm elections last Tuesday. Democrats managed to take control of the House of Representatives with Republicans maintaining control of the Senate. The initial reaction from markets was positive as the uncertainty surrounding the election results was lifted, although some of those gains were given up during Friday’s trading session. All in all, the U.S. equity market (as measured by the S&P 500) gained 2.21%, with international markets unable to keep pace. Bonds traded relatively flat as interest rates were largely unchanged following the Fed’s decision to stand pat at its November meeting. However, most market forecasters expect the Fed to implement one more rate hike before the end of the year.

Wages on the Rise
Earlier this month, the October jobs report came in much stronger than many expected (255,000 new jobs vs. the consensus forecast of 188,000), but the number that caught Wall Street’s attention was the change in Average Hourly Earnings (AHE). AHE rose 3.14% year over year, the first time throughout this entire economic expansion that AHE growth exceeded 3%. For more than six months now, there have been more job openings available in the economy than there are unemployed workers. The logical consequence is that employers need to offer prospective employees more money in order to entice them to join their company as opposed to competitors, and it appears that the wage growth numbers are finally beginning to reflect that reality. Wage growth is an important contributor to late cycle inflation, which will be top of mind for many market strategists, as well as the Federal Reserve, over the next few months.