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Fed rate cut & strong jobs data send S&P 500 to record high

When it comes to investing, we want our money to grow with the highest rates of return, and the lowest risk possible. While there are no shortcuts to getting rich, there are smart ways to go about it. – Phil Town, hedge fund manager and author

All three major stock averages closed at record highs last week as investors were treated to a plethora of good news in the form of continued strong quarterly earnings, a better than expected jobs report and an accommodative Federal Reserve. All in all, it added up to another solid week of gains for stocks with the S&P 500 posting its fourth consecutive winning week. Corporate earnings led the way as a broad range of companies reported profits that topped analysts’ estimates, including Apple and Facebook in the technology sector, Merck and Pfizer in the health care sector, Exxon Mobil in the energy sector, AT&T in the telecommunications sector and General Electric in the capital equipment sector. Roughly two-thirds of companies in the S&P 500 have reported third quarter earnings so far and about 75% of them have exceeded expectations. The Federal Open Market Committee (FOMC) also met last week and cut interest rates for the third straight time, lowering the federal funds rate by a quarter of one percent to a range of between 1.50% to 1.75%. In doing so, the Fed signaled that it would pause on any further easing and will be more data dependent when assessing whether or not to cut rates in the future. In its statement, the Fed said that the U.S. economy is strong but affected by factors such as global weakness, the U.S.-China trade war and uncertainties with regard to Brexit. In terms of economic data last week, the most important release was the October employment report and it was much better than expected. The report showed that 128,000 new jobs were created compared to estimates of 90,000 jobs and that the unemployment rate ticked slightly higher to 3.6% from 3.5%. The jobs numbers for August and September were also revised substantially higher and added 95,000 more jobs. About 42,000 jobs were lost due to the strike at General Motors, making the report that much more impressive. On the trade front, signals were decidedly mixed as there were reports that the U.S. and China were close to finalizing parts of the trade agreement but the meeting between President Trump and Chinese President Xi Jinping later this month in Chile was canceled. Chinese officials also cast doubt on the possibility of a long-term trade deal, creating still more uncertainty when the stock market is looking for just the opposite.

Last Week

Gross domestic product (GDP) grew by 1.9% in the third quarter, which was better than expected but down from 2% in the second quarter and 3.1% in the first quarter. Construction spending was better than expected in September but the ISM Purchasing Manager’s Index (PMI) in October contracted for the third straight month as sentiment remains cautious even as new orders are picking up. U.S. pending home sales rose for the second consecutive month and were much better than expected as lower mortgage rates helped spur sales. ADP also reported that private payrolls increased by 125,000 and topped expectations, another sign that the labor market remains strong and gives investors reassurance about the economy.

For the week, the Dow Jones Industrial Average rose 1.4% to close at 27,347 while the S&P 500 Index added 1.5% to close at 3,066. The Nasdaq Composite Index gained 1.7% to close at 8,386.

This Week

The ISM non-manufacturing or services sector Purchasing Manager’s Index (PMI) for October is expected to be higher than in September and solidly in expansion territory. The November University of Michigan consumer sentiment index is forecast to remain elevated and higher than the reading in October.

The Bank of England announces its monetary policy decision and is widely expected to keep its benchmark interest rate unchanged at 0.75%.

Among the most prominent companies scheduled to report earnings this week include Newmont Gold, Sysco, Walt Disney, Consolidated Energy, Duke Energy, Devon Energy, Marathon Oil, Prudential, Marriott International, Qualcomm, CVS Health, Emerson Electric and Johnson Controls.

Portfolio Strategy

Despite trading at all-time highs, there were more than enough positives last week to extend the current stock market rally even further. Granted that the third quarter earnings season is not over yet, but the results so far have exceeded everyone’s expectations and the fourth quarter is forecast to be even better. There is no question that global growth is slowing. Germany, Europe’s largest economy, recently slipped into a recession and overall growth in the euro-zone remains tepid. In comparison with the rest of the world, though, the U.S. economy looks strong as evidenced by the favorable jobs numbers reported last week. Strength in the labor market should bolster consumer spending, which when coupled with a better housing market, stabilization in the manufacturing sector and an expanding services sector, should produce about 2% GDP growth in the economy. This level of growth would be consistent with a Goldilocks economy, not too hot and not too cold, and allow the Federal Reserve to pause on any further easing as it said last week. The wild card in this scenario remains the uncertainty with regard to a trade agreement between the U.S. and China. Optimism on global trade and continued progress on U.S. trade talks should allow for further upside in the stock market.

I will be out of the office the beginning of next week so the next Weekly Market Commentary will be sent on Monday November 18th.