VIA NOVA UPDATE: Equities sold off despite little change in the positive fundamentals.

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  • Broad selloff blamed on numerous factors, but few facts.  S&P 500 valuation dropped below the five-year average.

  • Business optimism remained high and inflation remained contained.

  • Earnings season kicked off on a positive note.

  • The Week Ahead: More earnings and lots of economic data.

Broad selloff blamed on numerous factors, but few facts.  S&P 500 valuation dropped below the five-year average.

Stocks sold off broadly in the latest week.  Numerous reasons were cited for the sell-off including profit-taking, higher interest rates, an overly aggressive Fed rate hike policy, trade tensions, rising cost pressures and fears of a slowing economy.  However, these issues were not new and did not suddenly intensify sufficiently to account for such a steep drop.  The S&P 500 fell -4.07% and trimmed the year to date return to 5.07%.  Industrials, materials, financials and energy stocks led the sell-off, but all eleven sectors finished in the red.  Small cap equities also finished lower as did international and emerging market stocks.

Nothing has fundamentally changed in Via Nova’s outlook.  The domestic economy is strong, leading economic indicators are moving higher, inflation is contained, and earnings growth is very high.  Moreover, the sell-off pushed market valuations below the average of the past five years, so equities are more attractive now than they have been in some time. 

Sharp drops in market prices should not be ignored or dismissed out of hand, but sustained or deep market declines are typically associated with a weakening economy and falling corporate profits; neither of which is evident in the current market.  Via Nova will continue to monitor the economy, corporate earnings and market action carefully during this period of heightened volatility.

Bonds benefited from the increased stock market volatility, and the Bloomberg Barclays Aggregate Bond Index gained 0.46%, though it was -2.21% year to date.  In other markets, gold prices rose, but oil and real estate fell.  The dollar slipped -0.41%.

Business optimism remained high and inflation was contained.

The economic calendar was relatively light, but two key reports painted a positive picture of the current environment.  First, small business confidence remained high in September suggesting a positive outlook for profits, hiring and investment.  The second key report was a lower than expected increase in the Consumer Price Index in September.  Inflation, as measured by this index, increased 2.3% from a year ago; still above the Federal Reserve’s longer term 2% target.  However, inflation slowed to just a 1.8% annual rate over the past three months.

Via Nova believes the economy remains healthy and that the Fed will likely raise interest rates at their December meeting.  However, short term rates may not need to rise much more to reach the Fed’s hypothetical “neutral rate.”  The neutral rate is the interest rate that is neither stimulative or restrictive to economic growth.  If inflation remains near current levels, that neutral rate could be closer than currently projected by the markets, suggesting a slower pace of interest rate increases.

Earnings season kicked off on a positive note.

Third quarter earnings season got off to a positive start, with 86% of the 28 companies reporting better than expected profits.  Earnings are forecasted to increase 21.5% from a year ago.

The Week Ahead: More earnings and lots of economic data.

During the upcoming week, 55 S&P 500 companies (including 7 Dow 30 components) are scheduled to report results for the third quarter, and the results will be watched closely.On the economic front, the September Retail Sales report is espected to show a healthy 0.6% increase.Updates are also due for industrial production, housing starts and leading indicators.