Are you wearing rose colored glasses? Take them off and you may see Bifurcated Markets, Tariffs...

“These rose colored glasses
That I'm looking through
Show only the beauty
'Cause they hide all the truth”
-John W Conlee

Over the past year we’ve started to wonder whether U.S. investors are beginning to view the world through a pair of rose colored glasses. If one doesn’t look too critically and restricts their gaze to the U.S. alone, they’d certainly see a “rosy” picture. Strong revenue growth, and continued margin expansion combined to fuel great earnings across the board in the second quarter for U.S. companies. Following the Tax Cuts and Jobs Act, U.S. corporations have authorized a record amount of share buybacks. The U.S. Bureau of Economic Analysis (BEA) revised the second quarter’s GDP estimate to 4.1% annualized, the highest in years. The fundamentals are strong, consumers are confident, and the market is rising. What is there to worry about?

Source: Bloomberg, Compustat, FactSet, Standard & Poor’s, J.P. Morgan Asset Management. EPS levels are based on operating earnings per share. Earnings estimates are Standard & Poor’s consensus analyst expectations. Buybacks are based on company announcements year to date. Guide to the Markets – U.S. Data are as of September 30, 2018.

Plenty, in our opinion. We believe the current environment is not nearly as rosy as it seems. If you take a critical look and have a global perspective, there are a few thorns to contend with: namely an escalating trade war with China (and others) as well as quietly rising U.S. interest rates.

While we have written and blogged extensively on tariffs and the trade war, this is not the forum to continue my anti-tariff rants. However, it is worth pointing out that the trade war appears to be having a profound impact on the global economy. When the year began, the leading economic indicators for all 35 of the Organization for Economic
Co-operation and Development (OECD) countries were in positive territory and on an improving trend. Today, many of these trends have turned negative including the U.K., Germany, Italy, France (Europe as a whole), Brazil and Russia. China’s Purchasing Managers’ Index (PMI) has fallen to 50… the dividing line between growth and contraction.