MARKETS MOSTLY UP AS EARNINGS SEASON KICKS OFF AND THE IMF AGAIN CUTS ITS GLOBAL GROWTH OUTLOOK FOR 2019

• Stocks finished the week mostly higher as earnings season got off to a great start and amidst positive developments that the trade saga with China is getting closer to resolution
• The small–cap Russell 2000 led the way with a 1.6% gain, followed by the 0.5% gain of the S&P 500, which was barely ahead of NASDAQ\’s 0.4% gain
• The DJIA was on its way to a weekly gain but ended the week red, as Johnson & Johnson and Boeing registered big drops on Friday that pushed the DJIA into losing 0.2% on the week
• Seven of the 11 S&P 500 sectors finished in positive territory, with Health Care moving up 2.0%, closely followed by the Real Estate and Financials sectors which jumped 1.8% and 1.6%, respectively
• The Financials sector was buoyed by positive earnings results from the big banks, including JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup
• The week\’s most talked about data was the 0.3% decline in U.S. retail sales, which was the first drop since February
• Markets across Europe were good, after a tentative Brexit deal was reached between the UK and the European Union
• The International Monetary Fund cut its 2019 global growth forecast from 3.2% to 3.0%, citing the drag from rising trade tensions
• The U.S. Treasury market was quiet for a change, and the 2–year yield declined to 1.57% and the 10–year yield was relatively unchanged
• The U.S. Dollar Index fell 1.1% to 97.26
• WTI crude fell 1.8% to $53.76/barrel

Weekly Market Performance

Stocks Up as Earnings Season Kicks Off

Most of the U.S. stock markets were up on the week, with the concentrated–DJIA falling slightly on the week after Johnson & Johnson and Boeing each dropped more than 6% on Friday.

Other than the J&J and Boeing news, investors received some positive surprises on the earning front, bringing the S&P 500 within a whisper of its all–time high. The smaller–cap Russell 2000 Index also had a good week and jumped 1.6%, but it’s still down more than 10% from its August 2018 high, keeping it technically in correction territory.

The Health Care sector outperformed on the week for a change, pushed by gains in UnitedHealth Group, which reported better–than–expected revenues and raised profit guidance for the year.

Tuesday was the unofficial start of earnings season as 15% of S&P 500 companies were to report third–quarter results this week and a lot of them surprised on the upside. Earnings from JPMorgan Chase and Goldman Sachs were among the ones surprising investors on the upside, helping drive the Financials sector to outperform the markets in general.

Earnings Surprises Up – So Far

According to research firm Factset, as of Friday, 15% of the companies in the S&P 500 have reported actual results for Q3 2019:

• In terms of earnings, the percentage of companies reporting actual EPS above estimates (84%) is above the five–year average.
• In aggregate, companies are reporting earnings that are 2.6% above the estimates, which is below the five–year average.
• In terms of sales, the percentage of companies (64%) reporting actual sales above estimates is above the five–year average.
• In aggregate, companies are reporting sales that are 1.0% above estimates, which is also above the five–year average.

But in the not–so–great–news department, Factset also reports that:

• The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the third quarter is –4.7%, which is equal to the earnings decline of –4.7% last week.
• If –4.7% is the actual decline for the quarter, it will mark the first time the index has reported three straight quarters of year–over–year declines in earnings since Q4 2015 through Q2 2016.
• Seven sectors are reporting a year–over–year decline in earnings, led by the Energy, Information Technology, and Materials sectors.

Global Growth Forecast Cut by IMF

The International Monetary Fund made a fifth–straight cut to its 2019 global growth forecast, as trade tensions are weighing heavily on growth around the world.

The IMF projects the world economy will grow 3%, down from 3.2% seen just this past summer. Somewhat worrisome is that the forecast for 2019 is the weakest since 2009. Further, the IMF reduced its 2020 estimate to 3.4%, down from 3.5%.

From the IMF:

• Global growth remains subdued. Since the April World Economic Outlook (WEO) report, the United States further increased tariffs on certain Chinese imports and China retaliated by raising tariffs on a subset of US imports. Additional escalation was averted following the June G20 summit. Global technology supply chains were threatened by the prospect of US sanctions, Brexit–related uncertainty continued, and rising geopolitical tensions roiled energy prices.
• Against this backdrop, global growth is forecast at 3.2 percent in 2019, picking up to 3.5 percent in 2020 (0.1 percentage point lower than in the April WEO projections for both years). GDP releases so far this year, together with generally softening inflation, point to weaker-than-anticipated global activity. Investment and demand for consumer durables have been subdued across advanced and emerging market economies as firms and households continue to hold back on long–range spending. Accordingly, global trade, which is intensive in machinery and consumer durables, remains sluggish. The projected growth pickup in 2020 is precarious, presuming stabilization in currently stressed emerging market and developing economies and progress toward resolving trade policy differences.

Data, Data, Data

Reviewing this week\’s economic data, the most surprising was the decline in Retail Sales for the month of September, but there were other unexpected data points too.

• Total retail sales declined 0.3% month-over-month in September and consensus expectations was for a 0.3% increase
• August Retail sales was revised upward to 0.6% from 0.4%, which was a welcome revision
• Total business inventories were unchanged month–over–month in August and consensus expectations were for an increase of 0.2%
• Industrial production fell more than anticipated last month, dragged down by the General Motors strike
• Industrial production has now declined in five of the last nine months
• The NAHB Housing Market Index for October increased to 71 from 68 in September
• The weekly MBA Mortgage Applications Index ticked up 0.5% following a 5.4% increase in the prior week
• Overall housing starts also fell more than anticipated, but there was an increase in single–family starts

Sources

imf.org; factset.com; nahb.org; bls.gov; dol.gov; standardandpoors.com; nyse.com; msci.com; nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com