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Week in Review

Week Ending: Friday, October 19, 2018

Recap & Commentary

Markets, as measured by the S&P 500, were virtually unchanged for the week. However, that masked significant volatility in which the index rose over 2.0% on Tuesday only to fall nearly 1.5% on Thursday. Headlines were dominated by a number of topics including third-quarter earnings, the Fed, Brexit, Italy, and China.

The Fed’s September FOMC meeting minutes showed members to be relatively upbeat about current economic conditions. All participants supported the Fed’s September rate hike and the need to continue gradually raising rates. Markets were struck by the comment that a number of committee members feel it might be necessary for the Fed to temporarily overshoot its longer-term rate target to reduce the risk of inflation rising too rapidly or of significant financial imbalances.

Through Friday, 17% of S&P 500 companies had reported third-quarter earnings including nearly all of the big banks. Thus far, 80% of companies that have reported have beaten analyst expectations. According to industry group FactSet, year-over-year earnings growth is currently tracking at 19.5%.

Brexit negotiations remained at an impasse as officials, once again, failed to make any substantive progress on the issue of a hard border between Ireland and Northern Ireland. Officials on both sides have agreed to protect the Belfast Agreement that ended decades of violence between the two Irelands but, thus far, they have failed to determine how trade between the two would be regulated without a hard border.

Italy’s budget situation became more precarious after the EU effectively rejected a draft proposal. Italy’s populist government came to power, in part, by promising to reduce taxes and to reform the pension system. The proposed budget is at odds with European leaders who want to see Italy run smaller, not larger, deficits in order to address its €2.3T in public debt. Rising tensions may result in bouts of volatility.

China reported third-quarter GDP of 6.5%, below the expected growth of 6.6% and the slowest growth since 1Q09. Growth in industrial output and consumption weakened while exports held up despite U.S. tariffs. China is trying to balance economic growth while tackling rising debt levels and engaging in a trade war with the U.S.

Economic Bullet Points

Leading Indicators—The index of leading indicators rose an expected and very solid 0.5%, a strong signal for robust growth going into 2019. However, the report cited capacity constraints and the tight labor market as future headwinds to growth.

Retail Sales were softer than expected at the headline level in September rising just 0.1% versus the 0.6% expectation. Control group sales, however, which feed into GDP and exclude several volatile categories, came in better than expected increasing a solid 0.5% during the month.

Industrial Production improved 0.3% in September as durable goods and mining orders advanced. Year-over-year production growth is very strong at 5.1%.

Housing data continues to lag behind the advance in broad economic activity. Existing Home Sales fell 3.4%, and Housing Starts declined 5.3%.

Of Note

Storied retailer Sears filed for bankruptcy protection.  The company, formed in 1892 and once the largest retailer in the U.S., has struggled to compete effectively against competitors such as Walmart and Amazon.

Market Indices Week of 10/19

S&P 500                              0.0%

Russell 2000                    -0.3%

MSCI EAFE                       -0.1%

MSCI EM                          -0.9%

Commodities                  -0.3%

Barclay’s Agg.                 -0.4%

US Dollar Index                0.5%

10-Yr Yield                          3.2%

WTI Oil ($/bl)                      $69

Gold ($/oz)                      $1,228

The Week Ahead

  • GDP
  • New Home Sales
  • Durable Goods Orders
  • International Trade in Goods
  • Consumer Sentiment
  • Jobless Claims

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