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  • September 30, 2019

Week in Review

Week Ending: Friday, September 27, 2019

Recap & Commentary

Stocks fell during a week that was largely dominated by political headlines. On Tuesday, the House of Representatives announced it was launching a formal impeachment inquiry of President Trump. The immediate knee-jerk reaction on the part of markets was to pull back. However, an examination of the last two impeachment investigations suggests that markets are ultimately more focused on economics than politics.

In the year after the Richard Nixon impeachment investigation began, the S&P 500 fell 33% as the economy was already poised to enter a recession. In the year after the Bill Clinton impeachment investigation began, the S&P 500 rose 39% supported by strong economic growth. Thus, while the recent historical sample size is relatively small, it would seem to suggest that where markets go from here will ultimately be decided more by how trade talks and other fundamental issues unfold than the proceedings in Washington.

Economic data out of Europe continued to point to slowing conditions. German composite PMI data experienced its first contractionary reading since 2013, led by a steep drop in manufacturing, which fell to its lowest level since mid-2009.

Economic Bullet Points

GDP β€” In its third estimate, Q2 real GDP growth was unchanged at 2.0% annualized, matching the consensus. But it was a notable slowdown from the 3.1% rate last quarter. Additionally, real GDP has eased to 2.3% on a y/y basis, the slowest pace in two years, which reaffirms the slowdown in economic activity.

Corporate Profits β€” At a $1.9 trillion annualized rate, after-tax corporate profits rose a revised 0.3% y/y in the second quarter. When including inventory valuation and consumption adjustments, after-tax profits of $2.1 trillion were up 3.8% on the year. Also, taxes on corporate income, at $225 billion annualized, rose 4.5 percent from a year ago.

Durable Goods Orders rose 0.2% at the headline level, but core capital goods orders (nondefense, ex-aircraft), a less volatile measure, fell 0.2% and saw orders for the prior month revised down from a 0.2% gain to unchanged. In sum, the report indicates that capital spending continues to lose momentum.

New Home Sales rose 7.1% in August to a 713K unit pace. Inventories are falling, which should lift prices higher. Furthermore, housing is set to contribute to Q3 GDP growth for the first time in more than a year.

International Trade in Goods β€” Sharp improvement in agricultural exports is an isolated highlight of an otherwise subdued August report on goods trade that shows continued weakness overall for exports and limited results for imports. August's goods deficit totaled -$72.8 billion which is slightly better than Econoday's consensus estimate of -$73.4 billion.

Of Note

After a strong start to the year for initial public offerings (IPOs), the market appears to be cooling as investors become more discerning, avoiding companies with weaker fundamentals including high debt levels and negative earnings. The two most recent examples are co-working startup WeWork and stationary bike maker Peleton. The former recently pulled it’s IPO following questions about its valuation, while the latter fell -11% following its IPO on Thursday.

Market Indices Week of 9/27

S&P 500-1.0%
Small Caps-2.5%
Intl. Developed-0.9%
Intl. Emerging-1.2%
Commodities-1.1%
U.S. Bond Market0.4%
10-Year Treas. Yield1.69%
US Dollar0.6%
WTI Oil ($/bl)$56
Gold ($/oz)$1,508

The Week Ahead

  • US Manufacturing Data
  • US Services Data
  • Construction Spending
  • International Trade
  • Employment Situation Rep.

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