The Madison Weekly Market Wrap
November 3, 2019
Volume 6, Issue 44
A lot happened last week, with the market action being largely peripheral, despite all-time highs being reached by some stock indexes and healthy rallies in both stocks and bonds. On Wednesday, the Federal Reserve decided to cut interest rates for the third time in three months. In its previous statement, the Fed said it “will act as appropriate” to keep the economy going. This time, those words were missing. Instead, the Fed said it will “monitor the implications of incoming information for the economic outlook as it assesses the appropriate path.” In his post-meeting press conference, Fed Chair Jerome Powell said, “We believe that monetary policy is in a good place.”
Today, you have me to translate Fedspeak.
The Fed’s language change coupled with Mr. Powell’s comments suggest that the Fed is now on hold and will require additional evidence before easing further. Overall, that is probably good news for the market. Low real (after inflation) rates are usually very good for stocks. And despite repeated predictions from many analysts, there’s still no sign of broad-based inflation.
In economic news, ADP said the economy created 125,000 private-sector jobs last month, 5,000 above expectations. Friday’s government jobs report for October showed a better-than-expected 128,000 jobs added. Manufacturing data was again weak. The government said that the economy grew at a 1.9 percent real annualized rate in the third quarter. That’s decent, but not great, basically in line with the current expansion. Overall, there’s no imminent threat of a recession.
Many continue to anticipate the announcement of a “phase one” trade deal between the U.S. and China despite news that the two countries’ leaders would not be able to meet at a canceled upcoming economic summit in Chile. Obviously, an end to the trade war with China would be a very good thing for the economy.
Last week was the season’s busiest for third-quarter earnings reports (nearly a third – 158 – of S&P 500 companies delivered results last week). In a typical pattern, the majority of S&P 500 companies that have reported to date have beat analyst estimates, but both Thomson Reuters and FactSet expect overall earnings for the group to have declined modestly on a year-over-year basis. A plunge in profits in the volatile energy sector is expected to be largely responsible for the drop.
A Friday rally spurred by the strong monthly jobs report helped stocks move solidly higher for a fourth consecutive week. The large-cap S&P 500 and the tech-heavy Nasdaq reached new intraday and closing highs, while the smaller-cap benchmarks remained well off their late-2018 peaks. Within the S&P 500, health care stocks outperformed while energy shares lagged. Reflecting improved sentiment, the VIX — the so-called “fear index” — touched a four-month low.
As usual, Friday’s jobs data and Wednesday’s GDP data received plenty of trader attention, and it was positive for stocks. However, last week also brought further evidence of a persistent slowdown in manufacturing and business investment. The jobs report sparked a smaller reaction in the bond market, where longer-term U.S. Treasury yields rose somewhat on Friday but ended the week substantially lower as traders anticipate a pause in the Fed’s easing cycle. The benchmark 10-year U.S. Treasury note fell 12bp last week to yield 1.73 percent.
Many stock markets in Europe rose throughout last week, buoyed by the European Union’s decision to grant the UK a three-month Brexit extension, encouraging Chinese manufacturing data, and strong asset inflows into the region. In Asia, Japanese stocks traded slightly higher last week and Chinese stocks also recorded a weekly gain as strong earnings from mainland companies and data showing an upswing in private manufacturing activity offset U.S. trade-related concerns.
From the headlines…
The U.S. economy added 128,000 jobs in October — more than the 75,000 economists expected — while the unemployment rate ticked higher to 3.6 percent, the Bureau of Labor Statistics announced Friday. The strong numbers came despite job growth held down by the 40-day United Auto Workers strike against General Motors, which has since ended.
The Chicago PMI, a reading that tracks manufacturing companies based in the Midwest, produced its weakest reading in four years and the second lowest in a decade. The Institute for Supply Management’s manufacturing gauge showed the sector contracted in October for a third straight month.
So far, corporate earnings for the third quarter have been a bit better than expected.
The U.S. economy grew 1.9 percent in the third quarter. While slightly higher than what economists expected, the number marks a slowdown from the beginning of this year as the boost from President Trump’s tax cuts fades and the U.S.-China trade war weighs on growth.
The U.S. Treasury Department expressed continued interest in issuing a 50-year bond, for the first time, as part of efforts to expand its investor base as the budget deficit widens to $1 trillion.
“With leading Democratic presidential candidates proposing tens of trillions of dollars of new federal spending, Republicans’ abdication of fiscal conservatism leaves Americans with no responsible party.”
Chinese officials are casting doubts about reaching a comprehensive long-term trade deal with the U.S.
Tensions between the NBA and China have touched off an international firestorm. The parties remain at an impasse. They have also shined a light on the fight for human rights in Hong Kong — and the frontlinersat the center of the movement.
There has not been this much invested in money market funds since 2009.
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Americans paid banks $113 billion in credit card interest in 2018, up 12 percent from the $101 billion in interest paid in 2017, and up 49 percent over the last five years. That number is expected to go even higher for 2019.
“ALL BUSINESSES ARE LOOSELY FUNCTIONING DISASTERS, AND SOME ARE PROFITABLE DESPITE IT.– Brent Beshore
At 30,000 feet, the world is beautiful and orderly. On the ground, it’s chaotic and confusing. Nothing ever goes to plan. Surprises lurk around every corner. Things are constantly breaking. Someone is always upset. Mistakes are made daily. Expecting anything less is being out of touch with reality. And remember, just because you’re now aware of it doesn’t change reality. It was that way before, you just didn’t realize it.”
Securities and advisory services are offered through Madison Avenue Securities, LLC, a member of FINRA and SIPC, a registered investment advisor.
This report provides general information only and is based upon current public information we consider reliable. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment or any options, futures or derivatives related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Diversification does not guaranty against loss in declining markets.