In a nod to real economy versus the financial economy, last week saw equity markets lose ground despite an unquestionably strong corporate earnings season. Fed resolve on rate increases, U.S. Congressional investigations, Italy’s budget standoff with the EU, falling oil prices, Brexit negotiations, and U.S.-Sino trade conflict all factored into the volatility. Interest rates, oil, and the U.S. dollar all traded down on the week and oil entered bear market territory again, only four years removed from the last one.
- Hopes are rising for a preliminary trade deal with China at the upcoming November 30 G20 meetings. The clear connect between market volatility and trade conflict seem to be moving both parties toward a timelier resolution.
- We’re eight hikes in with Fed forecasts of one in December and three in 2019. However, market pricing and new Fed narratives suggest 2019 may not need three. Will market volatility pressure the Fed to walk back its 2019 plan?
- Atlanta Fed President Bostic indicated interest rates are not far from neutral and that rate hikes could end soon. Chairman Powell noted market volatility as one of many risk considerations. Equity markets rallied sharply on the Bostic presser and Powell acknowledgment.
- The recent wobble in inflation indicators are more likely temporary given most sentiment indicators are suggesting firmer inflation into 2019.
- Brexit turmoil last week gave rise to whether optimism surrounding the U.K. withdrawal from the EU may have been misplaced. Resignation of Dominic Raab, the person in charge of negotiating the withdrawal, calls for May’s resignation, and uncertainty whether the votes are there all added to the tenuous nature of looming March 29, 2019 deadline.
- Europe is generating some questions. Italy’s hard line on the budget standoff with the EU is adding to uncertainty. Meanwhile, Germany and Japan both posted negative 3Q Q/Q GDPs.
- The EIA announced a huge unexpected increase in oil inventories (10.3 vs 3.2 forecasted). An oil bear market is upon us but has distinctly different drivers than the 2014 bear. The Iranian oil embargo, unexpected waivers, refinery maintenance, and a global growth slowdown all factor in.
- Last week marked the unofficial end to 3Q18 earnings season. While bottom up results were robust, the stock market dropped 5% due to unrelated outside factors including Brexit negotiations, Italy vs EU, China trade, China growth, and Fed tightening cycle.
- The S&P 500 is at 25.7% blended earnings growth, the highest mark since 3Q10, and a 78% beat rate, the second highest mark on record. Blended sales growth is at 9.4% and a 61% beat rate. Forward guidance was negatively skewed and the 12mo Fwd P/E multiple is a modest 15.6x.
- As potential evidence of a rotation to value, the quantitative momentum factor has underperformed value by 3.3% since the relative performance peak back on October 1st.
- Trailing S&P 500 P/E, which peaked in January at 23.3x, has contracted to a much more reasonable 18.8x. Bespoke noted this week that it would be extremely unusual for P/E multiples to peak more than six months before prices did in September.
Economic Release Highlights
- October’s CPI report came in subdued at 2.5%/2.1% headline and core respectively. The core 3m/3m rate of change posted a low 1.6% rate. Despite recent declines in oil prices, rising energy costs were the primary upward driver CPI last month.
- October headline retail sales (+0.8%) were exceptionally strong, driven by auto (+1.1%), gasoline (+3.5%), and general merchandise sales (+0.5%), including e-commerce (+0.4%). However, the control group which excludes exceptional one-month readings, registered a more benign 0.3%.
- October industrial production (+0.1%) was impacted by hurricane related issues but ultimately posted respectable results in both manufacturing and capacity utilization.