Trade threats and impeachment inquiry weigh on stocks.

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  • Stocks fall as worries rise.

  • Economic data remains firm domestically but weakened in the EU.

  • Week Ahead: One trading day left in Q3.  Jobs report due Friday.

Stocks fall as worries rise.

Politics grabbed the spotlight again in the latest week pushing down stock prices.  The S&P 500 fell 1% trimming the third quarter market gain to just 1% with one trading day remaining.  Small caps and emerging markets were even weaker.  The uncertainty boosted the bond market by just under half a percent. 

Early in the week, House Democrats initiated an impeachment inquiry into President Trump for comments made in a call with the new Ukraine President Zelensky.  Specifically, the content of the call could suggest the President threatened to withhold foreign aid unless Ukraine began an investigation into questionable activities by Presidential candidate Joe Biden and his son, Hunter.  While the political theater grabbed national attention, the markets quickly recovered following an initial selloff.  There have only been two impeachment episodes in recent memory (Nixon and Clinton), but the evidence strongly suggests that the markets remained focus on economic and earnings fundamentals in each.  Stocks fell during the Nixon impeachment, but the economy was in a severe recession.  Stocks continued to rise during the Clinton impeachment hearing, because the economy and earnings were strong.

A more potentially serious development was a Bloomberg story on Friday reporting the possibility that the U.S. might cutoff further investment in China and delist Chinese stocks.  The S&P 500 fell 1% on the day.  While most analysts feel the odds of such a drastic move becoming reality are very low, worrisome news on Friday often turns investors defensive heading into the weekend.  Higher level trade talks in Washington are scheduled for October.

Economic data remains firm domestically but weakened in the EU.

The latest economic reports on the U.S. economy remained firmed, but new data from the EU suggested continuing weakness.  First, the recent drop in mortgage rates helped spur a stronger than expected rise in new home sales in August.  The housing market has been a laggard through this 10-year expansion but may be gathering fresh momentum.  Consumer income and spending continued to rise in the latest report, and consumer sentiment remained high.  The Fed’s preferred inflation measure, the Personal Consumption Expenditures Deflator, remained tame and is still below the 2% target.  Finally, new orders for durable goods, an indicator of investment spending, unexpectedly inched higher last month perhaps signaling some stability in the impact of the trade war.  However, economic momentum continued to sag overseas, and export powerhouse Germany may be close to recession.  HIS Markit surveys showed manufacturing activity in Germany fell to the lowest level in 10 years. 

Week Ahead: One trading day left in Q3.  Jobs report due Friday.

Monday will market the last day of the third quarter and the S&P 500 is barely hanging in positive territory, while small caps, international and emerging market stocks are all lower.  On Tuesday, China will celebrate the 70th anniversary of communist rule.  Impeachment hearings will likely dominate the airwaves for some time to come, but investors will focus their attention on the jobs report due Friday.  The consensus estimate is for another 150,000 gain in employment and a steady 3.7% unemployment rate.