Reprieve from Bond Market – Earnings: CRT, CAR, ACR, CUF, MSI
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Fears of an escalating trade war on a global scale are encouraging capital to move for safety. Demand for government bonds and shares paying secure dividends is pushing prices higher and yields lower, marking another weak of declining interest rates. Lower interest rates, with very few exceptions are positive for yield focused investors. Share prices also depend on earnings as well as the level of interest rates, and react to both.
Since trade wars are expected to be negative for earnings, this and the flight to safety are pushing the level of interest rates lower. Earnings growth could deteriorate from extra tariff costs tacked onto operating expenses. If a business can pass these costs along, this will attract the inflation hawks at central banks.
Yet in a world where full employment has not translated into wage growth, the outcome of the trade war could be different than presumed. Consider that earnings will not suffer as much as anticipated once all the disorientation to supply chains from tariffs settles down. Disruption provides opportunity; the inventiveness in business seems to find ways to compete. It will be a patchwork of winners and losers.
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