Based on my own personal experience – both as an investor in recent years and an expert witness in years past – rarely do more than three or four variables really count. Everything else is noise. – Martin Whitman, American investment advisor and founder of Third Avenue Management
The major stock averages closed mixed last week, which seemed entirely appropriate since the economic data, quarterly earnings reports and news events were both positive and negative. The Dow Jones Industrial Average finished modestly lower as Boeing, Johnson & Johnson and IBM weighed on the index, while the S&P 500 and the Nasdaq Composite Index posted slight gains despite increased uncertainty. Already investors are having doubts about the short-term trade deal between the U.S. and China and unsure whether or not the truce will hold through 2020. None of the terms agreed upon are in writing and nothing will probably be signed until President Trump meets with Chinese President Xi Jinping next month. China’s economy also only grew at 6% in the third quarter, which was the weakest growth in nearly three decades and raised additional concerns about slowing global growth. On a positive note, though, the European Union and the United Kingdom struck a tentative deal on Brexit that must now be approved by Britain’s Parliament, which will be no easy task. On the earnings front, it was a particularly good week for the financials as JP Morgan Chase, Citigroup and Bank of America led the way with better than expected third quarter revenue and earnings. Although only about 70 S&P 500 companies have reported earnings so far, the results have been encouraging as nearly 80% of them have topped expectations. Third quarter S&P 500 earnings were expected to fall about 5% year-over-year and analysts had lowered their estimates accordingly, but those estimates might prove to be too low based on the early returns. As far as the economic reports were concerned last week, retail sales for September was the most important piece of data and it was also a mixed bag. Expectations were for a modest increase, but sales actually fell for the first time in seven months. However, August retail sales were revised higher, which helped soften the blow even though it appears that consumption is slowing. Since consumer spending accounts for about 70% of economic activity, this would be a trend worth watching.
Other economic data last week also pointed to weakening trends in the economy. U.S. industrial production fell more than expected in September as output was reduced by the United Auto Workers strike at General Motors. Leading economic indicators in September fell for the second straight month due mostly to weakness in manufacturing. Weekly jobless claims rose slightly more than expected but layoffs continue to remain low.
The Federal Reserve Beige Book, which is a survey of businesses throughout the country, showed that the U.S. economy expanded at a modest pace in September and early October but that the growth outlook has been reduced over the next 6 to 12 months due to the impact of the trade war with China.
For the week, the Dow Jones Industrial Average fell 0.2% to close at 26,770 while the S&P 500 Index rose 0.5% to close at 2,986. The Nasdaq Composite Index also added 0.4% to close at 8,089.
Durable goods orders for September are forecast to drop slightly after posting a modest increase in August and September new home sales are also expected to decline slightly from the previous month. The final reading for October consumer sentiment should remain at high levels.
The European Central Bank (ECB) meets to review its monetary policy and is expected to leave its short-term benchmark interest rate unchanged at negative 0.5%.
It will be a very busy week for earnings as Procter & Gamble, McDonald’s, Visa, UPS, Eli Lilly, Baxter International, Microsoft, Intel, Amazon, Boeing, Caterpillar, Ford Motor, General Dynamics, 3M, United Technologies, Lockheed Martin and Verizon are among the most prominent companies scheduled to report.
With the possibility of a Brexit deal between the European Union and the United Kingdom and progress in U.S. and China trade negotiations, sentiment has become more positive on the stock market. After last week, the S&P 500 Index and the Dow Jones Industrial Average are only about 1% from their all-time highs while the Nasdaq Composite Index is within about 2% of its record high. Earnings season is only a week old but the results so far from about 15% of the companies in the S&P 500 have been impressive. Financials dominated the earnings parade last week and, for the most part, they topped expectations on both the top and bottom lines. But companies in other sectors, such as Coca Cola, Johnson & Johnson, UnitedHealth and Netflix, also announced better than expected earnings. This week could be more challenging, though, as there are 120 companies on the agenda that represent a much more diverse group of sectors. Many of these companies, such as Caterpillar, Boeing, 3M and Intel, have significant exposure overseas and could be adversely affected by both the strong dollar and weak overseas economies. Other companies such as Procter & Gamble and McDonald’s rely on strong consumer spending and could see weakness in their results since consumption seems to be slowing. But with the bar lowered for earnings in the third quarter, it should be easier for companies to exceed those reduced estimates, paving the way for stocks to move higher toward their all-time highs.