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Market in a Minute: Oct 14–18, 2019

Saturday, October 19, 2019

by Rich and Sheila Jamison

Executive Summary

A strong start to earnings season lifted equity markets. Three of the four most-watched indices finished ahead. The DJIA lost its gain Friday afternoon on alarming news about Boeing and JNJ (in Notable Events section).

Earnings reports were viewed generally as ‘better than feared.’ Seven of the 11 S&P 500 sectors finished positive. Healthcare, real estate and financials led the way. Trade and Brexit (whose saga got more interesting while we were writing this – see Globally section) muted gains somewhat.  

The 10-year US Treasury note yield was essentially flat (changing only in the third decimal place). WTI crude oil dropped 1.8% to $53.76/ barrel. The CBOE’s Volatility Index (VIX) fell to 14.3, down from 15.6 last week.  

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Details

Trade

China wants more trade talks before signing the touted “first phase” of the trade deal. Though details are unclear, it is reported China will address our intellectual property concerns and buy $40-$50 billion US agricultural products. In exchange, China wants the tariffs ended before it signs the deal. We suspended tariff increases on Chinese goods that were to have gone into effect last week. The September tariff hike and plans for the December 15 hike remain in place. It has been reported that China may struggle fulfilling its agreement to purchase the $50 billion of agricultural goods unless President Trump lifts the tariffs. Additionally, China threatened (unspecified) countermeasures against us if Congress passes legislation supporting the pro-democracy Hong Kong protesters. 

Earnings Season

Fifteen percent of the S&P 500 companies have reported for Q3 2019. Out of over 70 S&P 500 companies that reported Q3 earnings last week, 81% posted better-than-expected results. Blended earnings/share give earnings growth running at -4.8% year-over-year. Revenues are rising 2.7%.

Interest Rates

Disappointing economic data strengthened expectations for a Fed rate cut at the October FOMC meeting.

State and local governments are poised to sell municipal bonds at the fastest pace in almost two years as they take advantage of lower interest rates and strong investor demand.

Economy

September retail sales fell 0.3%, its first negative report in seven months.

The US imposed 25% tariffs on EU goods including French wine, Italian cheese and single malt whisky in retaliation for EU subsidies on aircraft.

Numerous indicators have shown slowing economic growth. Bloomberg Economic now predicts that our economy has a 27% chance of a recession in the next year. That probability is higher than last year’s but well below the probability predicted before the last recession.

Notable Events

Reuters reported that Boeing may have misled the FAA about the safety of its 737 MAX. Apparently, it had information in 2016 about the problem believed to have caused the two crashes and failed to disclose it to the FAA.

Friday afternoon news said Johnson and Johnson recalled 33,000 packages of baby power for traces of asbestos, the subject of many ongoing lawsuits. 

Globally

The International Monetary Fund (IMF) warned that the US/China trade war could cause 2019 global growth to fall to its slowest pace since the financial crisis. Additionally, the outlook could darken further if trade tensions remain unresolved. The World Economic Outlook report details economic difficulties caused by US/China tariffs, including direct costs, market turmoil, reduced investment and lower productivity due to supply chain disruptions. The IMF's latest projections are for 2019 GDP growth of 3.0%, down from 3.2% in July. It warns, "While easier financial conditions have supported economic growth and helped contain downside risks to the outlook in the near term, they have also encouraged more financial risk-taking and a further buildup of financial vulnerabilities, putting medium-term growth at risk."

Europe

Brexit negotiators from the UK and EU drafted a Brexit deal in last-minute talks on Thursday. However, the British Parliament held an extraordinary Saturday session to debate the deal and voted to withhold support until they scrutinized and passed all necessary legislation for an orderly exit. A British law passed last month specifies that if a deal has not been approved by 11 p.m. local time on Oct. 19 (tonight), Johnson is required to formally seek a three-month extension beyond the Oct. 31 Brexit deadline. This potentially pushes any exit into early 2020. Johnson said, “I will not negotiate a delay with the E.U. And neither does the law compel me to do so.” another Abbot and Costello “Who’s On First” episode occurred about an hour before the deadline. Johnson sent two letters. The first, unsigned, asked for an extension. The second, which he signed, stated the first complied with the law but that he thought any delay would be a mistake. Where this goes from here is anybody’s guess. The one likely outcome is British elections.

Germany, Europe’s biggest economy, cut its 2020 growth forecast expecting the impact of weakening global demand, Brexit and lingering trade disputes to carry over into next year. The Economic Ministry expects the country's GDP to expand by 1% next year, compared with previous expectations for a 1.5% increase. This is an improvement from this year’s 0.5% GDP growth projection but a notably slower pace than in previous years.

Mideast

The recent withdrawal of US troops from Syria’s northern border with Turkey quickly led to Turkish forces launching an offensive against Kurdish forces in Syria. Under widespread condemnation, the US and Turkey agreed to a five-day Turkish ceasefire on Thursday. However, fighting reportedly continued on Friday as Turkey continued to pound civilian areas and restrict medical aid in the middle of its fight with Kurdish forces. Earlier in the week, President Trump signed an executive order sanctioning Turkish officials, hiking tariffs up to 50% on Turkish steel and halting trade negotiations with the country, but has since cancelled those levies.

China

China reported Q3GDP growth of 6%, its slowest expansion since 1992.  

 


Sources:
Bloomberg News; Briefing.com; BusinessWeek.com; CNBC’s Power Lunch & Squawk Box; Crain’s New York Business; Dol.gov; Dorsey-Wright Associates; MarketWatch.com; Markit.com; MFS research; Morningstar.com; NASDAQ; NYMEX.com; NYSE; Reuters.com; Standardandpoors.com; Streetinsider.com; The Associated Press; The Financial Times.com; The New York Times; The Wall Street Journal Online; Thomsonreuters.com
 
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

 

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