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  • November 11, 2019

Week in Review

Week Ending: Friday, November 8, 2019

Recap & Commentary

Markets ended the week higher, driven by improved sentiment regarding trade talks between the U.S. and China. Despite its relatively modest gains, the S&P 500 set three new record highs over the course of the week. The improved sentiment was also reflected in bond yields, which saw the 10-Year Treasury yield rise 0.13% to end the week at 1.94%, its highest level since late July.

Over the course of the week, reports emerged that the U.S. and China were making steady progress towards finalizing a “Phase One” trade deal. As part of the potential deal, it was reported that the two sides pledged to roll back tariffs. However, on Friday, President Trump cast doubt on the success of the talks stating “I haven’t agreed to anything”, with respect to tariffs.

While investors would certainly like to see a deal finalized, our advice would be to exercise caution. Over the past two years, there have been other episodes where markets got overly optimistic about the possibility of a trade deal, only to be disappointed. We are not suggesting that the current round of talks will suffer the same fate, but until the deal is signed, caution is warranted.

Through Friday, 89% of S&P 500 companies had reported earnings. Thus far, 75% have beaten their earnings estimates, while 60% have beaten their revenue estimates. Current projections are for full-quarter earnings growth to be -2.4% lower than a year ago.

Economic Bullet Points

US Services data was mixed in October, but overall, the data suggested that the weakness in manufacturing activity has not been a significant drag on the rest of the economy. Still, on a 12-month average basis, services data has rolled over, as economic growth has moderated under the weight of trade and geopolitical tensions, and amid a diminishing impact from tax cuts.

Factory Orders fell -0.6% in September, its second straight decline, and below the consensus of -0.5%. The drag was mostly in transportation equipment, led by civilian aircraft and ships and boats. On a y/y basis, factory orders have dropped -1.7%, the most since September 2016, led by durables, as manufacturing activity remained soft due to significant fundamental pressures.

International Trade—The trade gap hit consensus expectations at -$52.5B for September, a five-month low, and improved from August's revised -$55.0B. On a 12-month aggregate basis, the trade deficit shrank to -$652.5 billion, which is a marginal improvement over the past few months, but still close to the widest gap since January 2009.

Consumer Sentiment ticked up 0.2 points in the preliminary November survey to 95.7. Sentiment peaked in March 2018 but remains elevated and range-bound longer-term, which suggests that consumer spending will continue to support the ongoing economic expansion. Nevertheless, the y/y momentum in sentiment has weakened, implying a slower pace of real GDP growth ahead.

Of Note

Walgreens Boots is exploring the possibility of going private in what would be the largest ever leveraged buyout. Walgreen’s current market capitalization is $55B. With an additional $15B in debt, the minimum deal size would be $70B; far greater than the $44B paid for Texas power company TXU in 2007.

Market Indices Week of 11/8

S&P 5000.9%
Small Caps0.6%
Intl. Developed0.8%
Intl. Emerging2.3%
Commodities-0.4%
U.S. Bond Market-0.9%
10-Year Treas. Yield1.94%
US Dollar1.2%
WTI Oil ($/bl)$57
Gold ($/oz)$1,459

The Week Ahead

  • Inflation: CPI & PPI
  • Retail Sales
  • Industrial Production
  • Small Business Optimism
  • Jobless Claims

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