HIGHLIGHTS:
Stocks hit fresh record.
Fed cut rates for a third time but signal a pause.
Job growth remains healthy.
Third quarter earnings beating lowered bar of expectations.
Less bad news on Brexit and China trade.
Week Ahead: Hopefully a quieter week.
Stocks hit fresh record.
Some good news and a lack of bad news helped lift the S&P 500 to a new record high in the latest week. The Federal Reserve cut short term interest rates for a third time, job growth was relatively strong despite the GM strike, third quarter corporate earnings growth was ahead of expectations, and there was little bad news on China trade and Brexit.
The S&P 500 rose 1½% led by health care, industrials and technology, with declines only in the more defensive utility and consumer staples sectors. Small cap stocks outperformed, while international and emerging markets stocks posted smaller gains. All-in-all, It was a good week for equities.
Fed cut rates for a third time but signal a pause.
The Federal Reserve Federal Open Market Committee (FOMC) lowered short term interest rates by another quarter percent as expected. Slower global growth, trade uncertainty and continued low inflation were cited as reasons for the cut. Some months back, Via Nova argued for at least three cuts for these very reasons and to restore some normalcy to the structure of interest rates. This third interest rate reduction by the Fed has gone a long way to accomplishing these goals.
While the FOMC cut rates as expected, they signaled that future rate reductions would need to pass a higher threshold, given that some of the recent threats to the global economy and the financial markets have lessened.
Job growth remains healthy.
The employment report is widely considered to be the most important single piece of economic data released each month. It is available early in the month, and it shows where and how many jobs are being created and lost. Jobs power consumer income which drives consumer spending-70% of the economy. The latest report showed stronger than expected job gains despite the roughly 40,000 temporary job losses due to the GM strike. Moreover, the gains in the previous two months were revised higher. Revisions to the prior two months is a usual part of the report. The unemployment rate ticked slightly higher, but that was due to a large increase in the labor force – a sign of improved consumer confidence. The continued employment gains continue to suggest a low risk of recession on the horizon.
Third quarter earnings beating lowered bar of expectations.
Companies are reporting better than expected third quarter profits, so far. While the aggregate earnings growth is down just under 1%, much of the decline is attributable to the energy sector. Over 75% of companies beat analysts’ forecasts compared to a long-term average of 65%. Earnings growth is projected to reaccelerate next year.
Less bad news on Brexit and China trade.
For once, the news on Brexit and China trade are both moving in a favorable direction. A Phase 1 trade deal with China is likely to be signed this month, and the risk of a disruptive No-Deal Brexit is lower. Trade tensions between the U.S. and China will likely continue for the foreseeable future, but a “truce” or more stable environment will allow companies to make reasonable business decisions and resume much-needed capital investment.
Week Ahead: Hopefully a quieter week.
The economic calendar will be considerably lighter in the coming week, so investors can focus on corporate earnings and guidance. Trade, Brexit and impeachment headlines will be an ongoing risks as always, but at least the outlook appears benign as we begin the week.