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  • November 5, 2018

Week in Review

Week Ending: Friday, November 2, 2018

Recap & Commentary

Markets rebounded significantly, with the S&P 500 recording its largest weekly gain since March. Notably, “riskier” areas of the market, such as small caps and emerging markets outperformed, with the latter posting its best weekly gain since March 2016.

While impossible to measure, analysts have questioned whether the looming mid-term elections have factored into the market’s recent volatility. To the extent that they have, after Tuesday, trade and monetary policy should once again dominate investors’ focus.

On Thursday, President Trump stated that he and Chinese President Xi Jinping had a “very good conversation,” raising hopes that the two countries might be able to strike a deal on trade at the G-20 meeting in Buenos Aires at the end of November.

Friday’s strong employment report reinforced the notion that the Fed will raise rates for a fourth time this year at its December meeting. While unemployment remained unchanged at 3.7%, the underlying details were strong. According to the household survey data, used to calculate the unemployment rate, 711k individuals entered the workforce in September while 600k individuals found employment. In addition, annual wage growth increased from 0.3% to 3.1%, the fastest pace since April 2009.  The increase suggests that tight labor market conditions are perhaps accelerating wage growth, the absence of which has proved vexing to economists.

Through Friday, 74% of S&P 500 companies have reported third-quarter earnings.  Thus far, 78% of companies have beaten their earnings estimates while 61% have beaten their sales estimates.  According to industry group FactSet, earnings growth is currently forecasted to be 24.9%, the second best pace since 3Q10.

 

Economic Bullet Points

Personal Income and Outlays—Household incomes rose a modest 0.2% in September. Spending, however, increased a higher-than-expected 0.4%, consistent with the strong consumption figure reported in last week’s Q3 GDP print. The spike in spending was likely driven, in part, by increased demand for durables after Hurricane Florence. Also, the Fed’s preferred inflation gauge, the PCE Deflator, remained atop its 2.0% target, which supports the expected rate hike in December.

Productivity and Costs—Q3 productivity growth decelerated but was above average at a 2.2% annualized rate versus an upward revised 3.0% last quarter. Costs, however, increased 1.2% in Q3, versus a  –1.0% contraction reported a quarter ago.

Manufacturing—Several popular indexes tracking US Manufacturing reported slightly mixed results, but in aggregate, the measures signaled that output growth in the US factory sector remains solid.

International Trade—the US trade deficit widened to $54B in September, up from $53.3B and $50B in the prior two months. Import data remained robust, while a stronger dollar and trade tensions have weighed on export growth.

Consumer Confidence—hit another cycle high and now sits just seven points below its all-time high set in January 2000 at the peak of the tech bubble.

 

Of Note

Berkshire Hathaway invested in two emerging payments firms, Paytm in India and StoneCo. in Brazil—apparently without Warren Buffett’s direct involvement. Berkshire has made some big bets in payments but has avoided younger, riskier tech companies.

 

Market Indices Week of 11/2

S&P 500                      2.4%

Russell 2000              4.3%

MSCI EAFE                 3.3%

MSCI EM                    6.1%

Commodities            -1.3%

Barclay’s Agg.           -0.7%

US Dollar Index        -0.1%

10-Yr Yield                   3.21%

Oil ($/bl)                        $63

Gold ($/oz)                 $1,232

The Week Ahead

  • PMI & ISM Services Indexes
  • Consumer Credit
  • PPI
  • Consumer Sentiment
  • Jobless Claims

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