Last week started with a good amount of encouraging market action but ultimately surrendered to the troublesome geopolitical situation with Saudi Arabia and more consternation about the course of Fed rate hikes. From a bottom up perspective, we saw a healthy start to third quarter earnings season and mixed results on the economy with continued strength in labor and industrial results but more signs of weakness in the housing sector. Overall, U.S. equity markets squeaked out minor gains while developed and emerging international markets continued to experience pressure.
- The prevailing higher interest rate bias is translating to pressure on higher valuation pockets of the market. Growth stocks (higher P/E underperformed value stocks notably on the week and intraday stock price reactions to earnings announcements have been critical.
- Whereas price reaction to earnings has been rough, the actual results have been robust, trending at a 19.5% blended earnings growth rate with 17% having reported.
- U.S. high yield spreads have widened out to two-year highs but remain relatively subdued in a longer-term context - seemingly more wary than stressed.
- While U.S. markets are in a near term downtrend (2 closes this week below 200-DMA), European and emerging markets are in the midst of a real 9-month drawdown. U.S., Japan, Australia, New Zealand, Canada, Mexico, and Brazil are the only markets not at least 10% from 52-week highs. The Shanghai Composite Index is -30% since January, trading at a 4-year low.
- Some obscure global economic indicators (Macau gambling revenues, Swiss watch exports, world trade, and commodity spot prices) are still growing but clearly slowing and/or rolling over.
- September FOMC minutes confirmed plans for a December hike and three in 2019. There was a hawkish tone however, as ‘several’ members believe fed funds rate will need to go beyond neutral into restrictive territory.
- Business inflation expectations, as measured by the Atlanta Fed, climbed to 2.3%, equaling the highest reading since the data series incepted in 2011.
- TS Lombard calculated China’s Q3 GDP growth at 6%, a clear slowdown and well below their 6.5% target. The concern is that easing maneuvers may be limited due to high debt levels, a tenuous housing market, and political pressure surrounding devaluation tactics.
- Investor sentiment moved toward the bullish camp last week with AAII bullish sentiment increasing from 30.6% up to 33.9%. Long term bullish average is 36.7%, which we’ve been well below for the majority of this very skeptical bull market.
- As expected, Treasury data is showing a sharp decline in corporate tax receipts (tax cuts), now back at 2010 levels and customs duties paid have risen 40% since late 2017 (tariffs).
Economic Release Highlights
- The Conference Board’s LEI/CEI ratio hit new highs last week, pushing out the likelihood of recession further out into the future.
- Headline September retail sales (+0.1%) missed expectations (0.6%) due to a decline in gas station and restaurant sales, both likely influenced by the Hurricane in September. The YoY core “control group” registered a solid 4.9%, still a rather constructive picture of the consumer.
- The August JOLTs report had job openings climbing to a record 7.136m, way in front of estimates. This was a surge from only 6.044m last August, an 18.1% gain in just one year. The number of people looking for work was 6.234m, so we have nearly 1mm more jobs than people looking - hard evidence that labor is scarce.
- The weekly jobless claims print has now been at or below 300K for a record 189 straight weeks, been at or below 250K for 54 straight weeks, and at or below 225K for 15 straight weeks.
- September business inventories grew 0.5%, a positive precursor to 3Q GDP growth.
- September industrial production beat expectations, climbing 0.3%. Mining (oil and gas) has continued to be a key driver this year.
- Industrial and manufacturing capacity utilization, which bottomed in 2016, have crept higher to 78.1% and 76.5% respectively. Manufacturing utilization is at its highest level since July 2015.
- A rare positive for the housing market - October homebuilder sentiment unexpectedly increased from 67 up to 68 versus estimates for a decline to 66. Offsetting that were falling housing starts (-5.3%) and permits (-0.6%).
- While negative headlines persist about housing affordability, it’s important to remember that affordability today, while declining (rates, prices, income), housing is still much less expensive now than any point between 1989-2009.