S&P 500 closes flat as slowing global growth and trade worries persist

The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed. – Peter Lynch

The Dow Jones Industrial Average eked out a small gain last week and ran its consecutive winning streak to seven despite troubling news from Europe and continued uncertainty regarding U.S. and China trade talks. The broad-based S&P 500 Index also closed slightly higher for the week after staging a late-day rally on Friday to pull it out of the red. Lately the S&P 500 has grown accustomed to starting each trading day weak and finishing strong, which usually is a bullish sign. Corporate earnings for the fourth quarter continue to be the focus and, for the most part, the results have been encouraging. With about 60% of S&P 500 companies having reported earnings so far, nearly 70% of them have topped analysts’ estimates. Although year-over-year earnings growth has been strong at roughly 13%, investors are aware that profit growth going forward will be much tougher to come by. In fact, first quarter earnings are expected to decline over 1%, the first year-over-year decline in earnings in more than 2 years. There were also conflicting reports last week on the current status of trade talks with China depending on who was talking at the White House. Treasury Secretary Steven Mnuchin said that the talks have been “very productive” while, the next day, White House economic advisor Larry Kudlow said that the U.S. and China were still a long way from striking a trade deal. President Trump also weighed in and said that a meeting between him and Chinese President Xi Jinping before the March 1^st deadline was highly unlikely. To add to investors’ worries, the European Commission cut its economic growth forecast in 2019 while the Bank of England also reduced its outlook for growth. Concerns over trade negotiations with China and slowing global economic growth have plagued the market for months now and, unfortunately, these issues will likely continue to affect stocks and cause volatility in the weeks ahead.

Last Week

It was a quiet week for economic data as the ISM non-manufacturing or services sector index in January fell slightly from its level in December and was slightly below expectations. Despite the slight drop, though, the reading was still well above the 50 threshold, a sign of continued strong expansion. Weekly jobless claims fell by 19,000 to 234,000 as the labor market also remains strong. For the first time in six months, the U.S. trade deficit actually fell in November after rising for five straight months.

Two regional banks, North Carolina-based BB&T and SunTrust Bank based in Atlanta, Georgia, agreed to merge in a $28 billion deal that will make it the 6^th largest bank in the U.S.

For the week, the Dow Jones Industrial Average rose 0.17% to close at 25,106 and the S&P 500 Index edged up 0.05% to close at 2,707. The Nasdaq Composite Index added 0.5% to close at 7,298.

This Week

Inflation data will dominate this week’s economic calendar. Both the January consumer price index (CPI) and producer price index (PPI) are expected to post a slight increase after declining slightly in December. January import prices are expected to fall modestly after posting similar declines last month. This data will confirm that inflation remains benign and give the Federal Reserve additional evidence that it can afford to be patient in raising interest rates. The preliminary University of Michigan consumer sentiment index for February is forecast to rebound from its level in January.

If there is no deal reached between President Donald Trump and the Democrat-controlled House by Friday February 15th, there will be another government shutdown.

Among the most prominent companies scheduled to report earnings this week are Occidental Petroleum, Marathon Oil, Duke Energy, WEC Energy, Coca Cola, PepsiCo, Cisco Systems, Applied Materials, Newell Brands, John Deere, Waste Management, CBS and Hilton Worldwide Holdings.

Portfolio Strategy

There are two exchange traded funds or ETFs that invest in stocks that provide investors with reliable, consistent dividend growth over the long haul. These funds have higher yields than the S&P 500 Index and generate growing income from companies that have solid growth prospects rather than just companies that offer attractive dividend yields. The first of these funds is the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which tracks an index with the same name and invests in companies that have increased dividends for at least 25 consecutive years. This fund has outperformed that S&P 500 Index since its inception and has done so with lower volatility. The yield on this fund at year-end was 2.75% and the top three sectors in the fund are industrials (23%), consumer staples (23%) and financials (12%). Technology and utility stocks each comprise less than 2% of the fund.  The other option for investors is the SPDR S&P Dividend ETF (SDY), which replicates the S&P High Yield Aristocrats Index. This index invests in companies that have consistently increased their dividend for at least 20 consecutive years and weights the stocks in the fund by their yield. Stocks in this fund have both capital growth and dividend income characteristics. The yield on this fund at year-end was 2.64%. Its weightings are slightly different than the S&P 500 Dividend Aristocrats Index in that financial stocks comprise 16% of the total and utility stocks comprise nearly 11%. In either case, both funds provide investors with excellent options for investing in companies that consistently increase their dividends.