Weekly Market Commentary – October 28, 2019

Economic data reinforced the view that trade disputes are pressuring economic growth and creating an uncertain environment for businesses to invest. Whether it was the weekly Brexit roller coaster, the U.S. durable goods report, Japanese exports, Korean imports or lowered IMF estimates, the message was the same: Uncertainty from trade has pushed economic growth lower.

According to the accompanying chart from FactSet, the slowdown has disproportionally affected global companies. Corporations in the S&P 500 generating more than 50% of their sales overseas are expected to report declines of nearly 10% this quarter. Domestically focused companies are expected to report only modest declines.

Key Points for the Week

  • Federal Reserve likely to cut rates this week by 0.25%.
  • IMF projects slower global growth as trade issues fester.
  • Global stocks’ earnings are declining more than domestic stocks in the U.S.

One bright spot: Global stocks weathered additional evidence of an economic slowdown well. The S&P 500 climbed 1.2%. The MSCI ACWI index of global stocks gained slightly more, rising 1.3%. The Bloomberg BarCap Aggregate Bond Index slid 0.2% as rates rose slightly on hopes of stronger economic growth from a potential trade deal.

This week will be a big news week. The Federal Reserve is expected to lower rates when it meets on October 30. Comments on the direction of future policy will be watched closely for indications of when the Fed might move next. U.S. GDP, jobs data and other key economic measures will also be released this week, and a large number of S&P 500 companies will announce quarterly earnings.

Q3 earnings

One More Time?

The Federal Reserve is widely expected to cut rates 0.25% for the third consecutive meeting as it responds to slowing economic data and the negative contributions of global trade. A few months ago, we facetiously suggested stamping “In the Fed We Trust” on stock certificates to express the confidence investors hold that the Fed will be able to balance out negative economic consequences and keep stocks heading higher.

The case for the current rate-cutting cycle has become stronger. A wide range of economic data show the U.S. economy remains reasonably healthy but is slowing at a steady pace. Economic data related to business investment, trade and manufacturing continue to slow across the globe.

During slowdowns of this type, the Federal Reserve has created expectations that it will cut rates three times by 0.25% and then pause. Current expectations for additional cuts are tempered by the recognition that this is the third cut and the Fed may slow down for a few meetings and assess their effect on the economy and markets.

The cuts have come at a faster pace than the rate hikes in 2018, which are being undone. Much of the reason is structural. The Fed rarely makes changes at meetings without a press conference scheduled. There used to be eight meetings per year, and every other meeting had a press conference. This year, Jerome Powell instituted a press conference at every meeting, and the Fed has used the altered landscape to steadily cut rates by 0.25% without skipping meetings.

The Fed remains in a strange place. Unemployment is low, and much of the slowdown is likely caused by disruptions related to trade disputes with China, Brexit and other policy issues. Like a band trying to figure out when to end a concert, the Fed must decide whether to call out “one more time” during the press conference following its October meeting or pause and see how the economy responds.

Fun Story

Nutrition Advice is Reversed Again!

People make fun of meteorologists and stock market prognosticators, but nutrition researchers are deserving of even more disdain. Earlier this month, researchers announced studies citing the negative effects of eating red meat were not statistically significant. This reverses previous conclusions indicating red meat raised the risk of various diseases. Perhaps you and a friend can research the news over a hot beef sandwich.

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