HIGHLIGHTS:
The S&P 500 finished down just above the 10% correction level.
The first estimate of third quarter GDP exceeded estimates.
Earnings reports beating expectations at the halfway mark.
The Week Ahead: More earnings and another jobs report.
The S&P 500 finished down just above the 10% correction level.
Market fears and jitters overwhelmed better-than-expected third quarter economic growth and strong corporate profit reports, continuing 2018’s back-and-forth market seesaw action. The combination of fears of aggressive Federal Reserve rate hikes, an escalating and potentially prolonged trade dispute with China and the upcoming midterm elections has generated a great deal of anxiety for the markets. Via Nova believes these fears and uncertainty are currently dominating market psychology.
The S&P 500 fell almost 4% for the week, and, at one point Friday, was down more than 10% from the all-time high on September 21st denoting a brief market “correction.” As is usually the case in a soft market, more defensive sectors, such as consumer staples and utilities, outperformed on a relative basis, but all S&P sectors declined. Also, small caps, international and emerging markets stocks were all lower.
Treasury yields retreated on the increased nervousness, following the recent spike higher, and the Bloomberg Barclays Aggregate Bond Index gained 0.57%, though it remained negative year to date. The dollar and gold were both was stronger, but oil prices declined for the third straight week.
The first estimate of third quarter GDP exceeded estimates.
Strong growth in employment and earnings, boosted by tax cuts, helped power consumer spending and overall GDP in the third quarter. Government spending, both national and local, also provided a lift, while corporate investment slowed. Third quarter GDP rose at a 3.5% annual rate, beating consensus expectations, but slower than the torrid pace in the second quarter. Economic growth has been on a higher trajectory over the past year, increasing 3.0% compared to the 2.1% growth rate since the beginning of the expansion in 2009.
But while growth has been healthy and above the economy’s theoretical “potential,” the GDP report showed that inflation slowed in the third quarter to a 1.7% rate, which is below the Federal Reserve’s 2% longer-term target. The drop in inflation was something of a surprise. Inflation usually picks up noticeably by this time in an economic cycle, but it has been notably subdued so far. Tame inflation data raises the question as to whether the Federal Reserve needs to raise interest rates as much as currently planned.
Earnings reports are beating expectations at the halfway mark.
Earnings reports are beating expectations at the halfway mark. S&P 500 third quarter earnings are up 25% from a year ago, and 79% reported a positive earnings surprise. Unfortunately, these reports have not been enough to ease some of the major concerns on the minds of investors which, to name a few, include the prospect of peak profit margins (due to higher input costs), the waning benefit of tax reform in the U.S., a stronger dollar, decelerating growth in China and trade war fears.
The Week Ahead: More earnings and another jobs report.
We will enter the second half of earnings season, and while profit growth is expected to remain strong, investors will be listening for management’s guidance of whether the gains can continue.On the economic front, the October jobs report will be the highlight of the week.Economists expect another strong gain of approximately 200,000, and the unemployment rate to remain at 3.7%.