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By Mike Liss - November 30, 2018
The biggest driver of market movement over the past quarter can be summed up in two words: trade war. The U.S. and China have been volleying threats—and imposing—tariffs on each other in an escalating game of tit for tat. In fact, the trade tensions have overshadowed still-strong corporate profits, which is another market driver. It’s important to note, however, that the current rate of corporate profit growth is probably going to slow, for a couple of reasons. In the video below, I touch upon those and several other crosswinds that make it impossible to predict exactly what the market will do in the next few months.
The biggest thing moving the markets, at least in the short term, was the escalating trade was with China. Our tariffs and their counter tariffs. And then another round from us and another round from them. In addition to that, you’ve had corporate profitability really off the charts. The tax cut for corporations has really kicked in and corporate profit growth was extremely strong in the quarter — unsustainably high. But we’re going to get a couple of quarters of very strong profit growth before it starts to go down somewhat in 2019. Not saying it won’t continue to grow. Corporate profits probably will continue to grow into 2019, just not at the same rate as 2018.
You have some other things like OPEC having meetings and starting to raise production because Venezuela production continues to be under pressure and Iranian barrels are coming off the market as U.S. sanctions snap back into place, but oil has basically stayed at the 70-75% range for the majority of the quarter. You put all that together, even with all those negative factors in the face of the market, and the market was still up for the quarter. Corporate profitability, or the strong growth of corporate profitability has really outweighed all those headwinds. It hasn’t been that continued synchronicity from the end of 2017 has not carried through into 2018. The U.S. economy has really continued to power through, and Europe and EM have slowed down quite a bit. And so it’s hard to tell exactly what’s going to happen, but it also hasn’t resulted in negative growth in Europe or in EM. They continued to limp along, although slowly.
The U.S. has really had a very strong GDP performance in the past two or three quarters. It’s really tough to call, in the short-term, what’s going to happen. You just have a lot of crosswinds out there — both negative and positive. Corporate profit growth has been extremely strong. You have so many negative headwinds out there as well. They all seem to be cancelling each other out enough so the market continues to slowly power higher.
It’s not cheap. We do not think the market is cheap by any stretch of the imagination so it’s hard for us to say well the market’s going to go up X amount over the next 3-4 months. It’s impossible to predict what the market is going to do, but we think we have a portfolio full of companies that will weather the storm. So it’s not clear if that means that we’re going into some kind of global recession or global slowdown. It doesn’t look like that to us.
Head of Investment Solutions Cleo Chang analyzes possible performance drivers in a volatile 2019 and market reactions to similar selloffs in the past.
February 8, 2019
Multi-Asset CIO Rich Weiss describes 2019 equity markets as likely having a split personality—one for the first half, and another for the second.
February 28, 2019
U.S. stocks declined significantly as investors grew concerned about whether the recent "truce"
would hold between the U.S. and China in their ongoing trade conflicts.
December 4, 2018
While the end of 2018 may have been rocky for financial markets, our value team is excited about their prospects in 2019.
February 6, 2019
What will 2019 look like? This quarter, Portfolio Manager Mike Liss considers the cumulative effect of crosswinds such as trade tensions and tax cuts.
November 30, 2018
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.