Coming Down

One quarter of the latest earnings reporting season for 2017 Q2 is now in the books. And unlike the impressive strength seen throughout the previous reporting season, reported earnings this time around are coming down from initial expectations. Whether they stabilize or how much further they drop in the weeks ahead remain to be seen, but this latest development is a somewhat troubling start for a market that badly needs to maintain corporate earnings growth with tightening monetary policy looming on the horizon.

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Earth Central Bankers Are Easy

Events taking place across capital markets have been out of this world in many ways over the last several years. Less than a decade after tumbling into the abyss, risk assets, including U.S. stocks, have been on a rocketship run ever since. And, markets are increasingly at risk of traveling off course and starting to rise uncontrollably into the atmosphere as we continue forward from here. The primary reason? Because central bankers across the globe are still too easy with their monetary policy.

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10 Years Gone

Then as it was exactly ten years ago today. The date was July 19, 2007, and the U.S. stock market closed at another new all-time high. The world was awash with liquidity, risk asset prices were steadily rising, and investor worries were few despite evidence of accumulating risks beneath the global financial system. What subsequently followed over the next 18 months was not only the reemergence of downside risk but the near collapse of the global financial system. Could such a fate possibly be again ten years on?

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Do You Believe In Magic?

Do you believe in magic? For when it comes to investing in capital markets, I do not. This does not mean that fantastic illusions cannot persist for a while longer. But in the end, I believe that the forces of reality will continue to hold sway. And whether magical or natural, this bodes well for the investment grade bond market in general and the long-term U.S. Treasury market in particular going forward.

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Have We Already Peaked?

Corporate earnings growth has been robust coming out of the latest profit recession. Following nearly two years of declining S&P 500 as reported annual earnings from 2015 Q1 to 2016 Q3, profit growth turned positive on a year over year basis in 2016 Q4 and accelerated with double-digit gains in 2017 Q1. On this measure, it appears that the corporate earnings outlook is becoming increasingly stellar as we move through the remainder of 2017. But taking a look at corporate earnings through another widely used measure suggests that all may not be so rosy when it comes to the strength of corporate earnings.

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