VIA NOVA UPDATE: Solid economic and earnings reports support equities.

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  • The S&P 500 finished flat in another volatile week.

  • Strong labor market data helped elevate rate hike fears. 

  • Interest rates appear to be slowing housing market.

  • Earnings reports beating expectations.

  • The Week Ahead: More earnings and the first estimate of third quarter GDP.

The S&P 500 finished flat in another volatile week.

The S&P 500 finished flat for the week but remained in the bull market uptrend that began in 2009.  The more defensive consumer staples and utilities sectors outperformed, while energy and consumer discretionary stocks lagged.  Technology and discretionary stocks dominated the market advance over the past twelve months, but many lagging sectors, such as health care and utilities have shown balancing strength in recent weeks.  Via Nova believes this “catch-up” and consolidation among the sectors is a positive development.  Small caps, international and emerging markets slipped lower.

Bond yields inched higher, and bond returns fell, as healthy economic reports continued to stoke fears of a more rapid pace of Federal Reserve tightening.  The yield on the 10-year Treasury note rose to 3.20%, and the and the Bloomberg Barclays Aggregate Bond Index declined -0.39%.  In other markets, real estate and gold gained, while oil prices declined.

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.  It bears repeating that 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.

Strong labor market data helped elevate rate hike fears.

Good economic news has challenged the equity markets in recent weeks, because the reports have raised fears that the Fed will decide to raise interest rates faster than expected.  The Job Openings and Labor Turnover Survey (JOLTS) showed job openings rose to a record high, suggesting that labor markets are tight and could kindle inflation pressures, as employers compete for qualified candidates.  The leading indicators index continued to move higher, and the Philadelphia Fed business survey was stronger than expected.  Third quarter economic growth is currently tracking just under 4% according to the Atlanta Fed. 

Interest rates appear to be slowing housing market.

In contrast to strong indicators in other markets, there were reports that suggest that rising levels of interest rates may already be slowing interest sensitive sectors such as housing.  Housing starts and existing home sales both disappointed in the latest reports and have been flat to slower throughout 2018.  Higher mortgage rates and recovering home prices increased monthly mortgage payments, which could be exerting downward pressure on sales and building.  Via Nova believes that the Federal Reserve’s gradual interest rate increases are already having an impact on some sectors of the economy, and the slowing could prompt the Fed to slow its projected pace of rate hikes in 2019.

Earnings reports beating expectations.

Third quarter earnings season continues to be healthy, with profits projected to increase nearly 22% from a year ago.  Over three-quarters of companies have beaten estimates so far, with the largest beats coming from communication services stocks.  Revenues are forecast to increase 7.3%.

The Week Ahead: More earnings and the first estimate of third quarter GDP.

Earnings season kicks into high gear this week, and forward guidance from companies will be a key focus.Also, we will get the first estimate of third quarter GDP.The consensus forecast is 3.5%, following the 4.2% rate of growth in the second quarter, but currently available data in the third quarter is tracking closer to 4%.