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Mixed Earnings News and Fed Anticipation Drive Stocks Down For the week of July 22, 2019

Key Market Data

07/12/2019 07/19/2019 One Week Change YTD One Year
S&P 500 Index 3,013.77 2,976.61 -1.23% +20.06% +8.30%
MSCI EAFE Index 1,921.45 1,918.88 -0.13% +14.36% +0.90%
Barclays Capital U.S. Aggregate Bond Index 2,163.87 2,172.01 +0.38% +6.13% +7.46%
10-year Treasury Note Rate 2.123% 2.056% -6.7 basis points -62.9 basis points -78.3 basis points

After hitting new highs, the major stock indexes finished down for the week as traders weighed mixed earnings news and pondered how much the Federal Reserve could cut rates when it meets next week. Most estimates have the Fed cutting its benchmark rate by a quarter-point or a half-point. Fed chairman Jerome Powell and other committee members have hinted strongly in recent comments that a drop is coming, the debate now is over how big that drop will be.

On Thursday, John Williams, president of the Federal Reserve Bank of New York and the vice chairman of the Fed’s Open Market Committee, said in a speech, “It pays to act quickly to lower rates at the first sign of economic distress,” leading some investors to think the Fed would institute a half-point cut. But on Friday the Fed issued a statement saying Williams wasn’t necessarily talking about near-term monetary policy, describing it as “an academic speech on 20 years of research.” Later that day, The Wall Street Journal said the Fed was “likely” to reduce its rate by only a quarter point, disappointing many investors and analysts who were hoping the Fed would act more decisively to spur inflation.

President Trump, who’s been vocal in enjoining the Fed to act aggressively, said he agreed with the statement by Williams as first reported, adding, “Don’t blow it!” Even so, the CME Group now puts the chance of a quarter-point cut at 77.5 percent and a half-point cut at 22.5 percent.

Second quarter earnings

Some high-profile companies reported second-quarter earnings last week with banks mostly performing well and Microsoft posting record revenue. There were also some major disappointments, notably Netflix and CSX, both of which saw their shares tumble 10 percent after disappointing reports. Overall, earnings for S&P 500 companies are forecast to fall 3 percent from a year earlier.

The debt ceiling

Treasury Secretary Steven Mnuchin sounds optimistic about the possibility of a deal to raise the debt ceiling. Mnuchin has warned that the government may run out of money before the end of the fiscal year. Mnuchin is trying to broker a two-year deal with Nancy Pelosi (D, CA), the Speaker of the House. Mnuchin said, “I don’t think the markets should be concerned,” and added, “We’re working hard, we’ll get there one way or another.” Congress leaves for its summer recess at the end of the week.

The trade talks

Despite the truce announced at the Group of 20 meeting in Osaka late last month, the two sides have yet to have a face-to-face meeting. One of the stumbling blocks is the restrictions on Huawei’s doing business in the United States, and last week both the House and Senate introduced bipartisan bills to retain restrictions on China’s largest telecommunications company. President Trump had temporarily lifted some of those restrictions to help restart negotiations.

A new minimum wage?

In a preview of what’s expected to be an issue for the Democrats in the 2020 election, the House backed a new national minimum wage of $15 an hour as of 2025, more than double the current $7.25. The Senate Majority Leader Mitch McConnell (R, KY), however, said he wouldn’t bring the bill to the floor for a vote. The minimum wage was last increased in 2009.

Tech under fire

Executives from Amazon, Apple, Facebook and Google appeared before Congress last week and were assailed from both sides of the aisle for wielding too much power and being politically biased. Lawmakers also had tough questions for Facebook over Libra, its proposed cryptocurrency.

Oil and Iran

The price of U.S. crude fell 7.6 percent last week because of reports about higher output but rebounded slightly on Friday over tensions between Iran and Great Britain after Iran seized at least one British oil tanker in the Gulf of Hormuz. This came shortly after the United States said it had shot down an Iranian drone, a claim Iran refuted.

A new leader for the EC; Parliament outflanks Boris Johnson

Ursula von der Leyen was confirmed as the new president of the European Commission and will begin her five-year term on Nov. 1. Ms. Von der Leyen will be the first woman to lead the EC. Christine Lagarde, nominated to succeed Mario Draghi as president of the European Central Bank, officially announced her resignation as head of the International Monetary Fund effective Sep. 12; her term would have ended in 2021.

The pro-Brexit Boris Johnson is expected to become Britain’s next prime minister. However, last week Parliament took a step to thwart him by passing a law prohibiting a prime minister from suspending Parliament and pushing through a “no deal” exit from the European Union. Great Britain has until the end of October to broker a divorce agreement with the EU. Yesterday, Philip Hammond, the Chancellor of the Exchequer, said he would resign if Mr. Johnson became prime minister.

In other news, retail sales rose 0.4 percent in June from an upwardly revised 0.4 percent in May. It's the fourth straight month of increases, and a 3.4 percent year-over-year increase. Industrial production was unchanged in June from May, but manufacturing output advanced 0.4 percent. Business inventories declined 0.3 percent in May from April. Housing starts fell 0.9 percent in June from the month before to an annualized rate of 1.25 million units but were up 6.2 percent from a year earlier. Applications for building permits fell 6.1 percent to 1.22 million and were off 6.6 percent from June of 2018. The University of Michigan’s consumer sentiment index was 98.4 in July after closing June at 98.2. And first-time jobless claims for the week ending Jul. 13 were up 8,000 to 216,000; the four-week moving average fell 250 to 218,750.

A look ahead

This week’s releases will include the latest on existing and new home sales, retail inventories, and the first reading for second quarter GDP, expected to come in at 1.8 percent.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.