Bad Taste

Bad taste.  Stocks sold off on Friday as traders were on edge about the newly minted trade deal with China, Brexit questions, and more weak signals from the US economy.  Earnings season is in full swing and investors have high hopes.

 

MY TWO CENTS

 

  1.  More than we can chew.  Friday was an interesting day for US equities.  After once again flirting with new highs, stocks seemed to lose their momentum as traders dealt with a number of persistent health issues in the market.  For one, Brexit continues to confuse many investors who remain unsure how to position their investments that have exposure to the EU.  On Friday, I urged my readers to remain calm in the wake of Boris Johnson’s announcement that he had an “excellent” deal with the EU.  Johnson simply had to get Parliamentary approval and boom, Brexit would happen as planned at the end of the month.  Not so fast Boris… said Parliament.  WHILE YOU WATCHED FOOTBALL (and BASEBALL) the House of Commons voted to send Johnson back to the EU to ask for an extension.  He asked and EU officials indicated that they would agree.  Also on Friday, China released their latest GDP, which showed that its economy grew just +6%, missing expectations and down from the previous quarter.  While many will scratch their heads and wonder why a growth number that many countries would love is a bad thing, it is important to put things into perspective.  China has been rapidly growing over the past few decades and Friday’s number is the worst read in almost 30 years.  Meanwhile rumblings in DC have been largely ignored by the markets (rightly so), but when Vice President Pence announces that he will be speaking this week about human rights in China, markets get the jitters.  While the US and China have agreed in principal to a Phase 1 trade deal, there still remains lots of unanswered questions and investors are concerned that a damning political speech could derail recent progress.  All in all, Friday did not feature any new bad information, just a whole lot of reminders about the mounting collection of things to worry about.

 

  1.  Merrily rolling on.  On Friday, the Conference Board released its Leading Index, which is widely watched by economists as an accurate measure of the future economy.  The number came in at -0.1% missing expectations after a -0.2% fall last month.  Looking down the table of factors that led to the decline one would note that pullbacks in consumer confidence and industrial production were factors.  We know by now that manufacturing has been weak for some time but consumers have been picking up the slack. However, there are some signs that consumers may be pulling back with a recently weak Consumer Confidencenumber and last week’s missed Retail Salesnumber.  Still stocks continue to hover below all time highs.  Perhaps it is recent progress on trade or some high profile earnings beats.  A partial trade deal is most likely already factored into the market and companies are exceeding a very low earnings bar.  That leaves one big factor giving hope to investors:  the Fed.  Whether they call it stimulus or not, the Fed has been pumping money into the banking system at an increasing rate.  This represents a change from last year in which they were reducing their balance sheet by selling securities, thus taking money out of the system.  Though there have been many Fed voices of restraint, the Fed is expected to cut rates further next week.  With a 91% probability of a -25 basis point cut, expectations appear to be high and the Fed does not have a habit of disappointing the market.  Adding to the support is the ongoing monetary easing by the ECB which has helped propel developed country stocks to similar highs as well.  The supportive roll of central bankers will continue to ease the worries of stocks traders despite the growing number of economic risks.

 

THE MARKETS

 

Stocks sold off on Friday as some old fears left traders wondering.  Bad news from Boeing, Johnson & Johnson, and IBM kept the Industrials in check and economic numbers underwhelmed for a second month in a row.  The S&P500 dropped by -0.39%, the Dow Jones Industrial Average sold off by -0.95%, the Russell 2000 slipped by -0.41%, and the NASDAQ Composite Index went down by -0.83%.  Bonds traded up and 10-year treasury yields remained steady at 1.75%.

 

WHAT’S NXT

 

– Haliburton beat expectations this morning and we will hear from Lennox International before the bell.  After the bell earnings include TD Ameritrade.

–  In the week ahead, we will get Existing Home Sales, New Home Sales, Durable Goods Orders, Manufacturing PMI, and University of Michigan Sentiment.  Please refer to the attached earnings and economic calendars for details.

daily chartbook 2019-10-21

earnings releases 10_21

econ numbers 10_21

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