Long and Short of It
Doug Walters
Trade talks are driving short-term volatility, but it is long-term fundamentals that have U.S. equities up nearly 20% this year…
Contributed by Doug Walters , Max Berkovich , ,
U.S. equities gave market watchers whiplash this week, first falling 2% only to rally back and then some, ending the week up over 0.6%. The daily moves were mainly driven by Chinese trade and tariff discussions. Talk of “phase 1” of a deal that would avoid implementation of this month’s tariff increases helped sentiment. While trade has been a bone of contention for investors this year, and can drive daily sentiment, it is important to point out that over longer periods of time, equity markets are driven by economic fundamentals. Despite trade-induced uncertainty, the S&P 500 is up nearly 20% year-to-date. We see this as a testament to still decent U.S. fundamentals, as well as a belief that the trade dispute with China will resolve before causing lasting damage.
Headlines This Week
Trade
Drama surrounding U.S.-China trade negotiations kept equity markets on edge around the world. Investors pushed stocks up on headlines of “phase 1” of a deal that will avoid near-term tariff hikes.
The Fed
Federal Reserve Chairman Jerome Powell has signaled that another rate cut is possible later this month. In addition, the Fed eased capital restrictions on banks, rolling back Dodd-Frank regulations placed after the 2008 Financial Crisis.
- According to Bloomberg Interest Probability metrics, there is about a 65% chance for the Fed to decrease the overnight lending rate by 0.25% from 2.00% to 1.75% later this month.
- The Fed also announced they will purchase U.S. Treasury bills next week to relieve liquidity strains in the money markets. This feels like balance sheet expansion, also known as Quantitative Easing (QE).
Inflation
The Consumer Price Index (inflation) reading was flat in September and remains stubbornly below 2% year-on-year.
- Of note, rent and health care costs rose while prices for gasoline and vehicles fell.
Brexit
U.K. Prime Minister Boris Johnson was able to move forward Brexit negotiations with the European Union (EU). The EU Commission said on Friday that “The EU and the U.K. have agreed to intensify discussions over the coming days,” giving a soft Brexit new hope.
65% chance for the Fed to decrease the overnight lending rate by 0.25% from 2.00% to 1.75% later this month.
The Week Ahead
Earnings season kicks off with a big day on Tuesday, including Johnson & Johnson (JNJ), UnitedHealth Group (UNH), JP Morgan (JPM), and BlackRock (BLK). Wednesday and Thursday will be equally as exciting with Union Pacific Corp. (UNP), US Bancorp (USB), M&T Bank Corp. (MTB), and Honeywell Int’l Inc. (HON) on the calendar.
- JP Morgan will be the most highly watched as the diversified financial company gives insight into banks, brokers, and credit cards.
- UnitedHealth Group and Johnson & Johnson will cover a large portion of the Health Care sector.
The European Union Council is meeting next Thursday and Friday amid the looming Brexit deadline.
- The main focus of the two-day event will likely be finding a resolution to the Brexit impasse.
- Recent discussions between the U.K. and the Irish Prime Ministers appear encouraging to investors.
- The Benn Act will require a delay of the October 31st Brexit deadline if no deal is in place by Saturday, October 19th.
The biggest story next week coming out of the U.S. will be the Retail Sales report, out on Wednesday.
- Experts expect sales to increase slightly (0.3%) compared to the prior month.
- Given that the consumer is the primary driver of the economy, many will look to this report to gauge the chance of another rate cut this month.
Stock Highlights From Max
Bolting Higher
A big day for the markets on Friday was the cherry on top of an otherwise risk-on week. As textbook as It can be, defensive sectors REITs, Utilities, and Consumer Staples were the lagging sectors. Energy was the leading sector, some of which may be due to a spike in crude prices in response to an alleged terrorist attack on an Iranian oil tanker in the Saudi port city of Jeddah. The next best sector this week was Industrials in response to “phase 1” of a deal with China and strong earnings from…
- Fastenal Co. (FAST), a distributor of industrial goods, reported a $0.03 bottom-line beat. While this beat doesn’t sound very impressive, investors cheered the news that the company signed on 282 new onsite locations for the distribution of its products in the quarter. This is a 30% year-over-year increase in locations. In addition, the company signed on 5,671 new vending machine sites, a 12% increase from last quarter. Non-fastener products now make-up 66% of sales when you get down to the nuts and bolts. On a macro level, investors are trying to figure out if the expected growth from Fastenal in any way translates to stronger manufacturing in the U.S. than recent surveys indicate. We will not have to wait too long to find out; earnings season kicks off in full force next week. Stay tuned to find out how this nail-biter ends!
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