Spring Quarterly Commentary

“Science advances one funeral at a time.” (paraphrased)
Max Karl Ernst Ludwig Planck, 1858-1947
German Physicist
Nobel Prize Winner, 1918
Originator of Modern Quantum Theories

A near mirror image of the fourth quarter, the first quarter began with the stock market rocketing higher in a nearly straight line. In one of the strongest quarters since the current bull market began in 2009, it managed to largely erase the carnage of the prior quarter and index levels are now back at all-time highs. Curiously, corporate earnings are trending in the opposite direction. First quarter earnings are expected to be lower than a year ago, with growth projected in only three of eleven sectors.1 At present, the back half of 2019 is supposed to deliver better earnings growth, but Wall Street always seems to expect better conditions... just a little over the horizon. The chart on the next page shows earnings estimates over time, and they have been coming down (the first quarter is in green).

There are a lot of indications we are “late” in the economic cycle. Companies are talking a lot about higher wages, which typically leads increases in average hourly earnings, as the below left chart illustrates. Those higher wages can be good for the economy, but also can squeeze corporate profit margins and lower profits.

There are some other potentially worrying signs, such as a decline in shipping indexes and slowing growth in factory orders, but overall, employment and economic growth are fine... which is of course rather late cycle in and of itself.