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Week in Review

Week Ending: Friday, October 26, 2018

Recap & Commentary

Global markets fell for the week on continued concerns about trade tensions. Investors were particularly focused on corporate earnings reports and comments by management teams that might provide insight into the impact of current trade policy on corporate fundamentals and by extension, broader economic growth.

For the week, the S&P fell –3.94%, its fourth-largest weekly decline of the year. Since reaching an all-time high in late September, the S&P is now down nearly -9.5%, very close to “correction” territory, defined as a decline of 10% or more from recent highs. According to Wilshire Associates, U.S. equity markets lost a total of $1.2T last week. As prices have fallen, valuations have become more attractive. At Friday’s close, the S&P 500 was trading at 16.3x forward 12-month earnings, down from18.1x as recently as late September and also below its 5-year average of 17.5x.

In a widely expected move, the European Union rejected Italy’s budget saying that the government was “openly and consciously” going against the previous commitment to shrinking the country’s deficit. Italy currently has the second highest debt-to-GDP ratio in the EU after Greece, at 131%.

Germany’s Angela Merkel announced that she will step down as chancellor in 2021 and the chair of her party this December. The announcement came after her party again suffered significant losses in regional elections held over the weekend.

Through Friday 48% of S&P 500 companies had reported third-quarter earnings. Of these, 77% and 59% have beaten their earnings and sales forecasts, respectively. According to industry group FactSet, earnings growth is currently tracking at 22.5%, up from last week’s forecasted growth of 19.4%. The upcoming week will see 139 S&P 50 companies report results. With investors watching closely to determine any potential impacts from trade and tariffs, volatility will likely remain heightened.

Economic Bullet Points

GDP—Third quarter GDP topped consensus expectations by two-tenths of a percent after growing at an annualized 3.5% rate. Despite the “beat,” the Q3 print represents a modest downshift from the 4.2% number registered last quarter, however, it shows that US economic growth remains above average. Importantly, this pace of expansion will likely lead the Fed to continue gradually raising rates given the strong labor market and firming inflation.

Housing—Weakness in the housing sector continued in September as New Home Sales declined 5.5%. Year to date, however, New Home Sales are up 3.4% a number slightly better than existing homes sales which are trending lower year to date.

Durable Goods Orders rose a better than expected 0.8%, driven by a doubling of orders for defense aircraft and a slight increase in transportation orders.

International Trade—September’s trade deficit widened to a deeper-than-expected -76B versus the -74.7B expectation, which loosely implicates the negative effects of the ongoing trade war.

Of Note

As of Friday, 192 stocks within the S&P 500 were down at least –10% YTD, while 103 stocks were down at least –20%, YTD.

Market Indices Week of 10/26

S&P 500                    -3.9%

Russell 2000             -3.8%

MSCI EAFE              -3.9%

MSCI EM                    -3.3%

Commodities            -1.1%

Barclay’s Agg.            0.5%

US Dollar Index         0.7%

10-Yr Yield                   3.08%

Oil ($/bl)                          $68

Gold ($/oz)                 $1,234

The Week Ahead

  • Personal Income and Outlays
  • Case-Shiller HPI
  • Consumer Confidence
  • Productivity and Costs
  • ISM Manufacturing Index
  • International Trade
  • Employment Situation

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