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Weekly Market Commentary, October 29, 2019

The Markets

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 (International Money Fund) 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 percent of their sales overseas are expected to report declines of nearly 10 percent this quarter. Domestically-focused companies are expected to report only modest declines.

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

This week may 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 (Gross Domestic Product), 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.


Data as of 10/25/2019 1-week YTD 1-Year 3-Year 5-Year 10-Year
Standard & Poor's 500 (Domestic Stocks) 1.2% 20.6% 11.7% 12.1% 9.0% 11.0%
Dow Jones Global ex-U.S. 1.2 12.1 9.3 4.9 1.9 2.3
10-year Treasury Note (Yield Only) 1.8 NA 3.1 1.8 2.3 3.6
Gold (per ounce) 1.6 18.1 23.0 6.0 4.3 3.7
Bloomberg Commodity Index 1.1 3.6 -6.1 -2.6 -7.4 -5.2

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.


One More Time?

The Federal Reserve is widely expected to cut rates 0.25 percent 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 it will cut rates three times by 0.25 percent and then pause. Current expectations for additional cuts are tempered by the recognition 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 percent 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.

 

SOURCES

https://www.barrons.com/articles/barrons-big-money-poll-why-wall-street-is-scared-of-washington-51572045878?mod=hp_HERO (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/10-28-19_Barrons-Big_Money_Poll-Why_Wall_Street_is_Scared_of_Washington-Footnote_1.pdf)
https://www.barrons.com/market-data?mod=BOL_HAMNAV
https://www.barrons.com/articles/s-p-500-closes-the-week-with-a-record-just-out-of-reach-51572062633?refsec=the-trader (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/10-28-19_Barrons-The_SandP_Closed_Out_the_Week_Strong_but_Not_Strong_Enough-Footnote_3.pdf)
https://archive.fortune.com/magazines/fortune/fortune_archive/1986/09/29/68098/index.htm
https://www.federalreserve.gov/econres/notes/feds-notes/how-does-intergenerational-wealth-transmission-affect-wealth-concentration-accessible-20180601.htm
https://newsroom.bankofamerica.com/press-releases/global-wealth-and-investment-management/study-finds-parents-worry-large-inheritance
https://www.theatlantic.com/family/archive/2019/10/big-inheritances-how-much-to-leave/600703/
https://www.goodreads.com/quotes/tag/inheritance