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Stocks Finish Mixed Amid Unclear Economic Signals For the week of October 21, 2019

Key Market Data

10/11/2019 10/18/2019 One Week Change YTD One Year
S&P 500 Index 2,970.27 2,986.20 +0.54% +21.05% +10.07%
MSCI EAFE Index 1,896.65 1,920.09 +1.24% +15.31% +7.46%
Barclays Capital U.S. Aggregate Bond Index 2,215.04 2,217.23 +0.10% +8.34% +10.89%
10-year Treasury Note Rate 1.731% 1.755% +2.4 basis points -93.0 basis points -142.5 basis points

Stocks finished the week mixed — the S&P 500 was up, the Dow down — as investors weighed a lot of mixed news. For instance, there were some upbeat third-quarter earnings reports, despite an expectation that earnings would fall, which would be three straight quarters of earnings declines. In addition, the trade war truce with China appeared to hold, but the details of the recently brokered deal remained opaque. And while the Federal Reserve is probably going to cut its benchmark rate again next week to bolster growth, it’s not a foregone conclusion. Finally, Great Britain and the European Union seemed to have worked out a Brexit deal on Thursday, but by Saturday morning it had all but fallen apart.

Q3 earnings

Third-quarter earnings are forecast to fall 4.6 percent from a year earlier, according to FactSet, but last week investors focused on the positive, pushing stocks up after strong reports from JPMorgan Chase, Citigroup, Coca-Cola and Netflix, among others. Even so, a number of companies that have reported, including Delta and General Mills, cited the strong dollar as taking a toll on their profits, and other companies are contending with the impact of the ongoing trade war.

Shares of Johnson & Johnson and Boeing plummeted late in the week after negative stories involving each company. Johnson & Johnson fell after a report that it would recall a shipment of baby powder due of traces of asbestos. Meanwhile, Boeing revealed that a pilot had been concerned about the safety of the 737 MAX back in 2016, three years before two of the company’s planes crashed.

China and the trade war

Though China and the U.S. are still scheduled to sign the recent trade deal early next month, the fine print about a key part of the agreement — China’s multi-billion-dollar purchase of American agricultural products is still up in the air. In addition, new tariffs are scheduled to take effect in mid-December.

Meanwhile, China said its economy only grew 6.0 percent in the third quarter, below the forecast of 6.1 percent and the slowest pace since the first quarter of 1992. Last week, the International Monetary Fund (IMF) said that global growth will slow to 3 percent this year because of the trade war, down from the IMF’s forecast of 3.2 percent in July. A 3 percent yearly growth rate would be the weakest in a decade. The IMF also lowered its forecast for U.S. GDP growth this year to 2.4 percent from 2.9 percent, and to 2.0 percent in 2020.

The Fed

The major indexes are within range of their all-time highs largely due to investor expectations that the Fed will cut its rate at the end of the month — it would be the third cut this year. In fact, the CME Group now puts the probability of a rate reduction at 90 percent. But last week Charles Evans, President of the Federal Reserve Bank of Chicago and a member of the Fed’s voting committee, said that two cuts were “probably” enough for 2019, adding, “We need to acknowledge that there is a limit to what monetary policy alone can accomplish.”

Brexit

With the deadline of Oct. 31 fast approaching, it looked as if Britain’s Prime Minister Boris Johnson had brokered a deal with the EU on Thursday. The deal included a compromise on the key sticking point, how to handle the border between Ireland, still in the EU, and Northern Ireland, part of Britain. Parliament, however, was uncooperative. Meeting on a Saturday for the first time since 1982, Parliament refused to even move the latest plan to a vote, forcing the British government to ask for yet another extension for its departure from the EU, the third, this time until the end of January 2020.

In an extraordinary step, Mr. Johnson did not sign the request and instead sent the EU a letter of his own asking it to hold off and see if he could bring the new plan to a vote in the next few days. “We must bring this process to a conclusion,” he said. The opposition in Parliament, meanwhile, is thought to be pushing for a new round of elections that it hopes could weaken Mr. Johnson’s hand.

Retail sales and industrial production decline

In other news, retail sales were unexpectedly off 0.3 percent in September from the month, the first decline since February, partly because gas prices dropped 0.7 percent. However, the figure for August was raised to 0.6 percent from the original estimate of 0.4 percent, and retail sales were up 4.1 percent year over year.

Industrial production declined 0.4 percent in September from August and was down 0.1 percent from a year earlier, the first year-over-year decline since 2016. Much of the drop was because manufacturing production fell 0.5 percent, which in turn was largely because of the strike affecting 30 of GM’s factories; auto production was off 4.2 percent in September from August. GM and the United Autoworkers Union have come to an agreement to end the month-long strike, but workers will remain on the picket line until union members have voted on the settlement package.

Housing starts tumbled 9.4 percent in September from the month before to an annualized 1.256 million, but August’s total was the highest in 12 years and single-family permits advanced 0.3 percent, the fourth straight month of gains. Starts were up 1.6 percent from a year earlier. Applications for building permits dipped 2.7 percent in September from August to an annual rate of 1.387 million; they had also hit a 12-year high in August. And first-time jobless claims for the week ending Oct. 12 rose 4,000 to 214,000; the four-week moving average was up 1,000 to 214,750.

A look ahead

This week’s updates will include the latest on existing and new home sales, consumer sentiment, the government’s preliminary readings for orders of capital and durable goods.

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.