Credit Suisse: Gold May Retest Record High of $1,921

GoldCore Note

Gold prices are marginally higher today and look set to have their best monthly gain since June 2016.

Spot gold was up 0.2% at $1,413.60 per ounce in late morning trading in Europe. Gold has risen over 8% this month so far. A monthly close above $1,400/oz will be positive from a technical trading perspective.

Gold prices have surged to the highest since 2013 as the U.S. and global economy slows and due to the likelihood of a return to ultra loose monetary policies. Rising geopolitical tensions  in the Middle East and between an aligned Iran, Russia and China versus the U.S. is also leading to safe haven demand. U.S.-Iran relations have deteriorated sharply whereby war has become a very real possibly alas.

Trade,  economic and geopolitical uncertainty have seen safe haven demand return and pushed prices higher. There are real concerns ahead of the very important trade talks between China and the United States this weekend.   

The meeting between Trump and Xi Jinping may determine the next phase in this dispute and whether the U.S.-China trade war deescalates or escalates.

Gold traders will be reluctant to go short today due to the scale of risks ahead of the likely Trump and Xi talks. Indeed some may move to cover their short positions as if there is no progress in ending the year-long trade dispute or indeed tensions escalate, gold will likely go higher.

Gold’s mood music has changed radically in the last month and banks, hedge funds and other institutions internationally have become much more bullish on gold. They are revising upwards their price forecasts for gold in 2019 and the coming years. 

Credit Suisse and Morgan Stanley are two such institution and they see gold having strong gains in the second half of 2019.

Credit Suisse analysts, like us, see gold returning to it’s record nominal high of $1,921/oz.

“Bigger picture though, given the magnitude of the base, which has taken six years to form, we suspect we could even see a retest of the $1,921 record high,” according to David Sneddon, global head of technical analysis at Credit Suisse.

Gold has established a multiyear base that could provide the platform for a “significant and long-lasting rally” for gold, he said. We concur with this view and indeed are more bullish as we see gold going to well over $3,000/oz in the long term.

Why Are Central Banks Buying Gold?

By Rick Mills | More Articles by Rick Mills

Why are central banks buying gold and dumping dollars?

The US Federal Reserve, the country’s central bank, did what many expected last Wednesday, and held interest rates steady, while signaling that a rate cut is on its way.

Despite pressure from President Trump to lower interest rates, the Federal Open Market Committee (FOMC) concluded after a two-day meeting that it will stay pat for now, meaning no change to the 2.25% to 2.5% range on the federal funds rate. Nine of 10 FOMC members voted to keep rates unchanged.

Language here is important. The Fed reportedly dropped its pledge to be “patient” on widely anticipated rate cuts, meaning it could be poised to act. Also, Reuters said, Fed Chair Jerome Powell stopped referring to below-target inflation as “transient”.

Reading between the lines gold traders took the message and ran with it, with the precious metal’s price hitting a five-year high.

Gold runs to $1,366

The result was an immediate jump in the gold price at 2 pm EST, with spot gold spiking to around [USD]$1,354 an ounce, then continuing its upward climb to set a new record of $1,360.10 – its best close since Jan. 25, 2018. [Subsequently rising to $1423/oz] The rise in gold futures was even more dramatic, with gold for delivery in August rocketing to a fresh high $1,366.60. The last time bullion was priced that high was just over five years ago.

“The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased,” the Fed’s statement said.

That’s putting it mildly. Read Dancing close to the exits to learn about all the economic headwinds blowing in America’s direction right now, including weak jobs numbers, trade war jitters, deteriorating business confidence and a yield curve inversion (10-year versus 3-month) which is an almost flawless recession indicator.

In short, everything we as gold investors want to see, along with a falling dollar which is likely to occur as well if interest rates are lopped.

Bonds getting crushed

According to the CME Group’s FedWatch tool, traders are pricing in an 80% chance of a rate cut in July and a 70% of another reduction in September.

Gold’s gains were at the expense of bond yields. The yield on the 10-year benchmark fell to a 21-month low (ie. September, 2017) at one point during the day, 2.017%, before recovering a tenth of a point to finish trading at 2.02%. The 10-year hasn’t fallen that low since Trump was elected on Nov. 8, 2016.

[Subsequently falling to 2.00%]

10-year T-bill yields are a key economic indicator, because they gauge investors’ confidence in the economy.

When confidence in the economy is low, investors would rather park their money in bonds than riskier stocks – causing bond prices to rise and yields to drop. When confidence is really low, investors prefer to invest in short-term bonds, knowing the government is more likely to pay them back with interest on a short-term versus a long-term bond.

Long-term Treasuries normally have a higher yield than short-term T-bills, because it takes a higher interest rate to attract investors to stay in a bond for 10 to 30 years. However right now, some yield curves (eg. 3-month, 3-year) have inverted, meaning short-term Treasuries pay higher interest than long-term Treasuries. This is known as a yield curve inversion; it has predicted every recession of the last 60 years, and is therefore closely watched.

Things are even worse in Europe’s sovereign bond markets. Mario Draghi, the president of the European Central Bank, said that “in the absence of any improvement”, referring to low growth and low inflation, more stimulus will be needed to goose the European Union’s economy. That could include interest rate cuts or a return to quantitative easing, where the ECB, like the Fed, prints currency to purchase government bonds.

After Draghi signaled two rate cuts this year as the solution, the euro sunk 0.3% against the dollar, prompting Trump to complain on Twitter that a weaker euro made it easier for Europe to compete against the US. “They have been getting away with this for years, along with China and others,” the president wrote.

However, if the ECB does decide to cut rates, they will be falling further into negative territory – a situation far different from when rates were higher and had more room to drop, post-financial crisis. Hard to imagine too many investors will be lining up for a bond whose rate of interest is actually declining…

But they are. Global tensions such as a potential war with Iran, unresolved trade disputes and anemic global growth, just to name three problems, are forcing investors into safe havens like government bonds, even though their rates are abysmal.

Incredibly, the European Central Bank has already whittled its rates down to below zero, as have four other central banks: Swiss National Bank, Denmark, Sweden and the Bank of Japan. The rates range from -0.1% to -0.8%.

Bond prices have surged and yields have tumbled (the two move in opposite directions) especially in Europe; the yield on Germany’s 10-year bond sunk to a record low, and the yield on France’s 10-year briefly turned negative, Marketwatch reported.

The value of government bonds with negative yields has reportedly swelled to $11.8 trillion, as of June 17. In fact, sovereign debt is more popular right now than tech stocks. “The move is part of a larger trend that saw the [Bank of America Merrill Lynch Fund Manager Survey]’s 79 participants move away from risk and toward positions that reflect fear of a coming economic slowdown spurred by a spreading trade war,” said CNBC.

Clash of currencies?  

Trump’s comments re Draghi in Europe and his continual belittling of Jerome Powell – the president reportedly sought a way to fire him for keeping interest rates too high – is actually nothing new.

They are part of a larger plan by the Trump administration to keep interest rates and the dollar low. This is a shift from his predecessors in the White House who have lobbied for a strong dollar.

But for Trump, a low dollar is the way to bring jobs back to the US after many were exported abroad to take advantage of lower labor costs, and therefore rebuild the US manufacturing sector, primarily, through cheaper exports. He’s particularly targeted China for competitively devaluing its currency, the yuan, to dump cheap exports into the US.

Here’s what Trump said on the campaign trail in 2016: “You look at what China is doing to our country in terms of making our product. They’re devaluing their currency, and there’s nobody in our government to fight them… they’re using our country as a piggy bank to rebuild China, and many other countries are doing the same thing.” “Our country’s in deep trouble. We don’t know what we’re doing when it comes to devaluations and all of these countries all over the world, especially China. They’re the best, the best ever at it. What they’re doing to us is a very, very sad thing.”

The question is, have we moved from a trade war to a currency war, and if so, what would that mean? Trump’s comments about Draghi appear to suggest a hardening of his stance against competitive devaluations. (The ECB chief responded, by the way, by saying “We don’t target the exchange rate” of the euro).

But as one commentator writes, Trump is playing a dangerous game that could lead to a currency war, in which countries keep slashing the value of their money in order to gain a trade advantage ie. lower-priced exports.

“Any economy that is suffering from a prolonged bout of undesirably low inflation is likely to favor a weak currency,” Jane Foley, a senior foreign exchange strategist at Rabobank, was quoted by CNN Business. “If several economies find themselves in the same boat coincidentally, the prerequisite conditions for a currency war are set.”

A communique from a G-20 meeting earlier this month states that finance ministers and central bankers have agreed that a currency war is in no country’s interest, and reaffirmed a commitment to refrain from competitive valuations.

However Trump, never one to bow to convention, could easily break the toothless commitment. A Bloomberg article on the subject notes that if the euro keeps dropping it may incite Trump to follow through on a threatened tariff on imported cars and car parts from the EU. Presumably the same spiral of currency devaluations and tariffs could apply to the China-US trade war, if China decides to devalue the yuan to gain an advantage over the US.

Central Bank gold buying

Along with the expectation of a looser economic policy, ie., lower interest rates, the gold price is also currently being supported by major central bank buying. The buying is taking place at the expense of US Treasuries.

Why are they buying? Gold prices usually go up when real interest rates turn negative, in other words, when interest rates minus the rate of inflation go below zero. While we aren’t there quite yet, taking a look at the 10-year benchmark Treasury yield reveals a rate of interest that has been dropping for some time.

Central banks purchase US Treasuries to bulk up their foreign exchange reserves. They do this especially during periods of unrest, or when the economic forecast is bleak. Gold’s role as a safe haven is well-documented. Of course Treasuries are as much or more sought-out by investors in a crisis or pending crisis, but lately, Treasuries have become much less popular as a means of storing wealth.

The reason is simple: T-bills don’t offer a good return, and neither do other sovereign debt instruments – as mentioned, five important central banks are offering negative rates.

Looking at the 10-year yield chart, we see the yield starting to go down last November, falling steadily all the way to its current 2.02%. Subtract 1.8% inflation and the yield, just 0.22% begins to look pretty skinny.

There’s an old saying on Wall Street “Six percent interest will draw money from the moon.” And it’s true, but what is also true is 1. As long as real interest rates are below 2% gold is in a bull market and 2. Real interest rates below 2% draws investors to gold.

Central banks know this, so do educated gold buyers.

With Treasury notes paying such low net yields, gold becomes an attractive investment. And while the precious metal offers no yield, its status as an inflation hedge and store of value not subject to fiat currency manipulation are good reasons for central banks to purchase gold.

It doesn’t take an economist to see what’s happening here. Central banks see Treasury yields slumping and real yields low, and likely on their way negative, so they are backing up the truck for gold. They see gold continuing to increase in value.

According to the World Council, central banks are continuing a buying spree that stretches back to 2018. A total of 651 tons of gold was accumulated last year, 74% more than 2017 and the highest amount since the end of the gold standard in 1971.

So far in 2019, central banks have squirreled away 207 tons in bank vaults, the highest year-to-date purchases since central banks became net gold buyers in 2010. (before that they were net sellers, selling more gold than purchased).

On a quarterly basis, central banks bought way more gold in the first quarter of 2019 than Q1 2018. The WGC reports first-quarter purchases were the highest in six years, rising 68% above the year-ago quarter. It was the strongest start to a year for gold buying since 2013.

Russia and China were the top two purchasers, particularly Russia which has been trying every means available to diversify away from the US dollar – such as selling US Treasuries and signing energy deals with China whereby the transactions are in yuan or rubles, not USD. The Central Bank of Russia loaded up on 274 tonnes.

China has increased its monthly gold purchases by nearly 50%, to 15 tonnes a month, according to Kitco, with the Philippines’ central bank announcing plans to buy up to 30 tonnes of bullion a year. Other leading purchasers were Turkey, Kazakhstan, India, Iraq, Poland and Hungary, the World Gold Council report states.

The annual survey also said none of the central banks plan on reducing their exposure to gold over the next year from May, with 18% saying they plan to increase their bullion holdings.

The 2018-19 gold-buying spree is being driven by the de-dollarization of countries like Russia, China and Turkey which have an axe to grind with the US. They want to get out from under the thumb of Uncle Sam.

Forbes notes central banks’ motivations for buying gold are different than they were in previous decades when the financial system was back-stopped by gold:

In the distant past, central banks had to buy gold because of its vital role in the global financial system. Now they are choosing to do so because they are worried about the dollar. In other words, they’ve been scared into this bullion buying binge.

Jeff Christian, managing partner at CPM Group, a New York-based commodities consultancy, agrees. “Today central banks are buying gold to diversify their monetary reserves,” says CPM’s Christian. “Most central banks want to diversify away from the dollar.”

He gives the example of Russia where, as Forbes reports, the change may be partly driven by the need to ditch dollars and unentangle their countries from the US banking system.

Dumping Treasuries

Central bank gold buying is only one half of the equation we are presenting. The other half is the buying and selling of US Treasuries. Is it safe to assume that if central banks are buying gold, they are also selling, or buying, less Treasuries? If only it were so simple.

Russia and China certainly fall into that category. The Central Bank of Russia sold 85% of its Treasuries last year while at the same time loading up on gold. China resumed adding gold to its reserves last December (and has continued to do so) while at the same time it dumped $69 billion in Treasuries in 2018.

However, foreign investors of US debt, including central banks and private companies, reportedly raised their holdings of US Treasuries between April of last year and April of this year, by $253 billion, to a total of $6.43 trillion.

Here’s where it gets complicated. Wolfstreet tells us that over the same period, the US national debt climbed by $960 billion to around $22 trillion. So the share of the debt held by foreign investors actually dropped to 28%, from 34%.

That means some other entities must have bought the $707 billion difference ($960B minus $253B). According to Wolfstreet, of the $22 trillion national debt, foreign investors including central banks only own $6.4 trillion. The majority of US government paper is held by US government entities, which piled on $102 billion, and American institutions and individuals, which bought a whopping $876 billion in T-bills, year over year until April 30. This latter group represents $7.6 trillion of the national debt, or 34%. The remaining $5.8 trillion is held by US government entities, with the Federal Reserve owning just $2.1 trillion.

The two takeaways here, are that since 2015, foreign debt holders have been gradually moving away from T-bill purchases. Whereas the percentage of the national debt owned by foreign entities rose almost every year from 2001 to 2015, since then, it has gradually dropped, to 28%. And second, it’s American institutions and US citizens who own most of the country’s mounting pile of debt, not central banks or the Federal Reserve.


The US dollar is the most important unit of account for international trade, the main medium of exchange for settling international transactions, and a store of value for central banks.

Yet central banks no longer consider the USD the “gold standard” of foreign exchange. As large Treasury holders like China and Russia “de-dollarize” in favor of other debt instruments that don’t tie them to the US banking system, the dollar is losing its “exorbitant privilege” we have written about before. Gold is the beneficiary of this change.

Central banks backed up the truck for gold in 2018, buying 651.5 tonnes versus 375 tonnes in 2017. That’s the largest net purchase of gold since 1967. And the buying spree appears to be continuing.

Wednesday’s spike in the gold price shows that gold is the play for investors right now. We know that gold prices go up when real interest rates go negative. The net 10-year yield hasn’t yet gone below zero but it’s pretty close, currently 0.22%. Central banks have some very smart people working for them. They see real yields dropping, a yield curve inversion predicting an energy spike (war with Iran) and gold climbing. Why buy a bond that pays you 0.22% real interest, or possibly going to a negative rate of interest?

As we see it, things are only going to get worse for Treasuries and better for bullion. Think about it. We have a number of indicators pointing to an economic slowdown, both globally and in the US. We have an inverted yield curve on 10-year/ 3-month Treasuries); inversion presages a recession within 14 months with almost 100% reliability. There are several hot spots in the world that boost safe haven demand, like Iran, the South China Sea, Yemen, just to name a few. We have an unresolved trade war with China and a revised NAFTA agreement that has yet to be ratified. A trade fight between the US and the EU over autos is also brewing. Central banks are dumping Treasuries and buying gold. There’s a global movement afoot to increase stimulus to goose flagging economies, evidenced by low inflation. If the Fed does go ahead and lower rates, the dollar will follow suit. It may keep falling if a currency war ensues, which becomes more and more likely the longer we go without a China-US trade deal.

Unless something drastic happens, like Trump finding religion in “Xism”, or backs off on Iran (Iran shot down a US drone and the US will retaliate), or the Fed reverses course and raises interest rates, it’s the perfect storm for gold.

The Dow Just Hit a New High. It’s Time to Talk About a Recession.

July 1, 2019 at 3:01 p.m. ET By Ben Levisohn

Why the stock market’s ‘sojourn into depravity’ is about to crush short-sellers

Stocks were hitting news highs after U.S. President Donald Trump and Chinese President Xi Jinping agreed to a trade cease-fire. Unfortunately, the agreement might have come too late to keep the U.S. from slipping into recession.

Yes, the Dow Jones Industrial Average just traded at a new high. So did the S&P 500. But there were other data points Monday that point in the opposite direction. The ISM manufacturing index fell to 51.7 in June. While that wasn’t as low as feared or below the 50-level that would indicate slowing industrial activity, it was still the weakest reading since 2016. The forward-looking new-orders component, however, fell to 50.

“Overall, this report is probably not enough to move the needle much in either direction on Fed rate cuts,” according to a report from research firm Capital Economics. “But with global demand set to remain subdued, and the tariff truce agreed at the G20 summit likely to prove temporary, we expect U.S. manufacturing activity to remain weak in the second half of this year.”

Weak, obviously, is different than slowing. Yet any time the economy slows, there is a risk of recession, which is one reason the difference between the yields on the 10-year Treasury and the three-month bill has turned negative. That is known as a yield-curve inversion, and research has shown that if it lasts long enough, it is a reliable predictor of a recession. The Cleveland Fed recession model, which is based on that yield curve, is predicting a 37.8% chance of a slowdown in one year.

A similar model from the New York Fed only shows a 29.6% chance, but that’s not necessarily good news. Since 1960, any reading over 30% has led to a recession, according to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “The upshot is the New York Fed Probability of Recession in 12 Months Ahead, a model that uses leading indicators and economic variables that tend to move before changes in the economy, has neared the 30% threshold that has reliably predicted past economic downturns,” she writes. “With the deterioration in the June data, we think the model’s next report will show the economy continued to weaken.”

The market doesn’t seem too sure of itself, either. The major indexes were up more than 1% in early trading, but despite hitting new highs, the Dow and the S&P 500 don’t look like they’ll be able to close at them. The Dow has advanced just 23.39 points, or 0.1%, to 26,623.35 at 2:25 p.m., below its record close of 26,828.39. The S&P 500, meanwhile, has risen just 0.4% to 2,953.31, just below its all-time high of 2,954.18.

Let’s just say that kind of weakness after such a strong opening isn’t the type of trading that builds confidence in further gains.

Silver Poised for a Breakout 

Contributed Opinion


Source: Clive Maund for Streetwise Reports  (7/1/19)

Technical analyst Clive Maund discusses why he believes silver is amazingly cheap and a sure sign that a major precious metals sector bull market is starting.

We have already been over the reasons why a major precious metals (PM) sector bull market is starting, and remarked on how undervalued silver is compared to gold, and how this is typical at the start of a major sector bull market. But it is worth "thumping the table" over this, because silver and silver investments may well be the best place of all to put your money at this time.

Many silver investors are manic-depressive and fanatical, which is a reality that we can turn to our advantage, for if we can figure when they are just starting to emerge from the depths of despair, it is the time to move into the sector in a big way.

They are just starting to emerge from the depths of despair right now as it happens, which is shown graphically by the silver-to-gold ratio, the basis of which is that when investors in the sector are at their most risk-averse, they tend to favor gold over silver. This is hardly surprising, as gold conjures up images of solidity and security to a much greater extent than silver, which is also known as "poor man's gold."

It is thus most illuminating to observe a long-term 20-year chart of the silver-to-gold ratio. Here we see that the rare occasions where it has dropped to the extremely low levels it is now at have always preceded a major sector bull market, except early in 2016, which preceded a big rally. What is remarkable right now is that this ratio has even exceeded its earlier record lows, which makes a new sector bull market even more likely. This indicator, just by itself, is a strong sign that this is what's brewing.

Now to examine silver's latest charts to see how it is shaping up.

On the six-month chart we can see that although silver has reversed, breaking out of its preceding downtrend into a new uptrend, it has still only risen by a meager $1 from its late May lows—big deal!! Rather than being upset by this, we should be thankful that it hasn't risen more, because otherwise silver investments would have gone through the roof. Silver's restrained performance so far is giving us more time to buy investments across the sector before it really gets moving. An important point to note before leaving this chart is the strong volume on a big up-day last week, which was the second biggest up-day volume in history, which is a very bullish sign.

The three-year chart shows that silver has been an especially dull market during this period. But what is interesting is to compare this chart to the three-year chart for gold in the article Gold's Epochal Breakout, which looks way different and shows a massive divergence that is going to be made good by silver catching up big time at some point. Although silver's three-year chart still doesn't look very inspiring, with weak price performance and an overhang of resistance between about $16 and $18.50, the volume buildup of recent weeks, coupled with gold's strong performance, suggests this resistance could be overcome a lot more quickly and easily than many would believe possible.

Finally, the long-term 10-year chart shows that despite gold breaking out from its giant six-year long base pattern over the past week or so, silver is still scraping along not very far off its lows. However, this is not a situation that is expected to persist for much longer. If gold goes up it's going to take silver with it, and the volume buildup in silver as it has risen off recent lows suggests that this rally has legs. What is believed to be happening is that silver is just starting to rise off the second low of a double bottom, whose first low occurred late in 2015/early in 2016. If this interpretation is correct, then we are at an excellent entry point here for all silver-related investments.

Grim Earnings Forecasts Are Getting Worse by the Week

By Sarah Ponczek July 2, 2019, 1:11 PM PDT

  • More than 80% of companies have cut their earnings outlook

  • Analysts downgraded the most stocks in June since 2017


On Wall Street, it’s not exactly a news bulletin when companies cut profit forecasts two weeks before earnings season. Easier to clear a lowered bar, when results are released. Right now, though, something more worrisome may be at work.

More than 80% of S&P 500 companies that have revised their profit estimates one way or the other in the lead-up to reporting have slashed them, data compiled by Bloomberg show. Analysts are in on the action too, reducing company projections at the fastest pace in near three years.

“One of the things that investors seem to be overlooking is how poor the earnings environment is,” said David Spika, president of GuideStone Capital Management. “We’re so focused on monetary policy and this mythical China deal that we just don’t seem to be paying attention to earnings, which are really what should be driving stock prices.”

In and of itself, a flurry of downward revisions is nothing unusual at this time of year. Companies are always more likely to disclose bad news, and a few may be interested in lowering estimates before they report. But the extent of the negativity this time around is notable and is another burden for investors struggling to formulate views on the economy, global trade and the Federal Reserve.

Of S&P 500 companies that have revised their profit outlook over the past couple months, 82% cut, data compiled by Bloomberg show. The proportion bears an eerie similarity to the third quarter of last year, right before stocks plunged nearly 20%. Before that, you have to go back to 2015 to find more pessimism.

Wall Street analysts have been forcefully downgrading estimates too. In June, they cut forecasts on 116 more stocks than they upgraded them for, the worst reading since September 2017, according to Sundial Capital Research. Typically, analysts firm up their forecasts during the last month of a quarter, and this time “they’re worried,” said Sundial’s Jason Goepfert.

“There is some sagging in earnings,” said John Lekas, chief executive officer and senior portfolio manager at Leader Capital. “I’m not disputing that earnings across the board are priced to perfection. You know, you’re going to get some disappointments in there.”

The earnings headwinds have been plenty -- from a relatively stronger dollar in the second quarter to lower oil prices, higher input costs and uncertainty from the ongoing U.S.-China trade war. While a recent truce between the two world superpowers was taken as a positive, the benefit is likely short-lived since company executives are still in the dark on what comes next.

“Companies are still wait-and-see,” Samantha Azzarello, global market strategist for JPMorgan ETFs, said in an interview at Bloomberg’s New York headquarters. “The earnings outlook probably has downside because we didn’t get this resolution of any type.”

Citigroup Inc. is set to kick off the official second quarter earnings season in earnest on July 15, with other large banks following shortly thereafter. After avoiding a profit decline in the first quarter, companies in the S&P 500 will again be tested. Estimates call for a 2.5% drop in earnings for the three-month period ended in June. Should the negative reading hold, it would mark the first profit contraction in three years.

On Wall Street, it’s assumed that companies lower their forecasts only to make beating them easier. With that in mind, earnings-per-share will likely come in positive for the second quarter, according to Jonathan Golub, the chief U.S. equity strategist at Credit Suisse. Strip out the positive effect from share buybacks, though, and an earnings contraction is still in the cards.

Still, it’s not like anyone is calling for Armageddon. A modest decline in the second quarter is expected to be followed by a modest rebound in the third and a 7% gain in the fourth. By the middle of 2020, companies should start seeing double digit profit growth once again, if the forecasts hold true. But with geopolitical tensions lingering and a question mark surrounding global growth, those estimates are feeble.

It’s a high stakes season.

“Even as a macro strategist, I will be watching individual earnings reports,” said Frances Donald, chief economist for Manulife Investment Management. “One of the big reasons is most economists and the Federal Reserve are going to be watching for signs that the uncertainty created by trade tensions have already weighed on the economy. Not just the tariffs themselves, but the lack of visibility into future trade relationships.”

— With assistance by Olivia Rinaldi, and Vildana Hajric

Earnings recession risk increases as a flood of warnings hit

Published: July 3, 2019 7:09 a.m. ET By TOMI KILGORE REPORTER AND EDITOR

S&P 500 earnings set to decline for a second straight quarter, and maybe a third

The S&P 500 looks set to suffer its first earnings recession in three years, as the number of companies cutting guidance is among the highest seen in the past 13 years.

The unofficial start of the second-quarter earnings reporting season is less than two weeks away, and preliminary reports suggest the outlook keeps getting worse. The blended year-over-year growth estimate for earnings per share for the S&P 500, which represents already reported results and the average analyst estimates of coming results, is negative 2.82% as of early morning Wednesday, with six of 11 sectors estimated to post declines, according to data provided by FactSet.

Actual reports, however, have been much worse. With 20 of the 505 S&P 500 companies, or about 4%, having already reported results, actual reported EPS is down 14.69% from a year ago.

Adding to the negative outlook, 113 S&P 500 companies have issued EPS guidance as the second quarter ended, with 87 companies, or 77% of that total, providing guidance that was below the average estimate of analysts. That is well above the five-year average of 74 companies that warn of earnings misses, and the second most since FactSet began tracking data in 2006.

The only time the number was higher at this stage was in the first quarter of 2016, when 92 companies warned of earnings misses. Overall EPS fell 6.58% that quarter, FactSet said.

The negative outlook comes after a 0.29% EPS decline in the first quarter. An earnings “recession” is often defined as two straight quarters of declines.

The last time the S&P 500 suffered an earnings recession was the second quarter of 2016, when earnings declined for four straight quarters.

Among sectors, materials is set to be the worst earnings performer, with the blended growth estimate currently showing a negative 16.84%, FactSet said. The sector expected to grow EPS the most is health care, but the blended estimate is currently just 2.12%.

Earnings season will kick off on Monday, July 15, with five S&P 500 companies scheduled to report results. Here are the blended second-quarter estimates for all 11 sectors through midday Tuesday, including what the estimates were as of March 31 and the actual reported results.

Third-quarter earnings aren’t looking so good either. The blended growth estimate is currently negative 0.52%, down from an estimate of 1.19% growth as of March 31. A nice rebound is expected in the fourth quarter, as the 2019 EPS growth estimate is 2.68%, despite the declines seen for the first three quarters.

As MarketWatch contributor Mark Hulbert wrote Tuesday, an earnings recession might not be as scary for investors as it sounds. But based on what happened during the last recession, investors may not enjoy the ride too much.

The S&P 500 started the last earnings recession with a 6.9% tumble during the third quarter of 2015, but rose the next three quarters for a total gain of 1.7% during the four-quarter streak of EPS declines.

And for the first quarter of 2019, when earnings declined 0.29%, the S&P 500 shot up 13.1%. During the second quarter, as the earnings recession is estimated to begin, the index gained 3.8%.


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