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Stocks Flirt With Record Highs For the week of October 28, 2019

Key Market Data

10/18/2019 10/25/2019 One Week Change YTD One Year
S&P 500 Index 2,986.20 3,022.55 +1.22% +22.54% +14.01%
MSCI EAFE Index 1,920.09 1,944.22 +1.26% +16.77% +12.97%
Barclays Capital U.S. Aggregate Bond Index 2,217.23 2,213.86 -0.15% +8.17% +10.59%
10-year Treasury Note Rate 1.755% 1.796% +4.1 basis points -88.9 basis points -132.2 basis points

The major stock indexes are again flirting with all-time highs as mixed third-quarter earnings news was more than offset by upbeat reports about the ongoing trade negotiations between the U.S. and China.

Q3 earnings

A number of the S&P 500’s biggest companies have now released third-quarter earnings. Positive surprises over the past week included Procter & Gamble, Tesla and Microsoft. There were also disappointments, such as Boeing, Ford, and McDonald’s. With 40 percent of S&P 500 companies having now reported, 81 percent have exceeded analysts’ expectations. Even so, earnings are expected to be down from a year earlier for the third quarter in a row. Several companies have cited the trade war as a key factor in declining sales and earnings.

The trade war

The “phase one deal” the U.S. and China agreed to earlier in the month still isn’t final but reports that the two sides are nearing the finish line were enough to spur the stock market last week. In exchange for the U.S. not imposing new tariffs on Chinese goods, the Chinese have pledged to buy billions in American agricultural products, further protect intellectual property, and open their markets to foreign financial firms. On Friday, the office of the U.S. Trade Representative said that phone conversations with China’s lead negotiator Liu He were ongoing and “the two sides are close to finalizing some sections of the agreement.” As a result, the Dow had its best day of the week, while the S&P 500 set a record during intraday trading before falling back to close the week at 3,022.55. The deal is still expected to be signed early next month in Santiago, Chile, where both President Trump and China’s President Xi Jinping will be attending the Asia-Pacific Economic Conference.

Brexit

It was the best of times, it was the worst of times last week for Brexit. The good news for Prime Minister Boris Johnson was that Parliament approved in principle the revised plan that he worked out with the European Union; Parliament three times rejected plans negotiated by his predecessor Theresa May. The bad news is that Parliament won’t bring the plan to a vote before the latest deadline of Oct. 31, meaning Britain will have to ask the EU for yet another extension, probably until the end of January. Mr. Johnson, who has said he would never ask for an extension (though his government did), responded by calling for a “snap” election on Dec. 12 to try and strengthen the Conservative Party’s hand in Parliament, but the election, which will be voted on today, is not expected to be approved.

Farewell to Draghi

Mario Draghi presided over his last meeting as President of the European Central Bank this past week after eight years on the job; Christine Lagarde will succeed him on Nov. 1. No new action was taken at the meeting and Mr. Draghi, once hailed as the euro’s savior, is said to be leaving behind a board widely divided about next steps, particularly on the new round of quantitative easing announced last month. Ms. Lagarde attended the meeting. Olli Rehn, the head of Finland’s central bank was quoted in The Financial Times saying, “There is no doubt that improving team spirit on the governing council is an important challenge for Christine Lagarde and for all of us.” At his last news conference, Mr. Draghi, famous for saying back in 2012 that he would do “whatever it takes,” to save the euro, described his legacy as, “Never give up.”

The deficit

The federal deficit for the fiscal year that ended on Sept. 30 was $984 billion, the highest total since 2012 and up 26 percent from the deficit of $779 billion in fiscal 2018. The annual deficit has increased for four years in a row — the first time that has happened since the early 1980’s. The deficit is now expected to exceed $1 trillion in 2020. The deficit for 2019 represents 4.6 percent of GDP compared to 3.8 percent last year.

Back to work

The membership of the United Automobile Workers voted to accept the deal from management to end its 40-day strike. 46,000 GM workers are expected back on the job this week. The strike, along with Boeing’s suspension of production of its 737 MAX, took a toll on manufacturing output as well as orders for durable goods, which declined 1.1 percent in September from August, the first drop in four months. Orders for durable goods ex-transportation fell 0.3 percent, while orders for nondefense capital goods excluding aircraft declined 0.5 percent.

New and existing home sales decline

In other news, the National Association of Realtors said that existing home sales fell 2.2 percent in September from August to an annualized rate of 5.38 million, but were up 3.9 percent from a year earlier. Lower mortgage rates were offset by higher prices, with the median price up 5.9 percent from a year earlier to $272,100, and lower inventory, which was down 2.7 percent year over year. New home sales fell 0.7 percent in September from the month before to an annual rate of 701,000 but were up 15.5 percent from September of 2018. The median sales price was $299,400. And first-time jobless claims for the week ending Oct. 19 fell 6,000 to 212,000; the four-week moving average dipped 750 to 215,000.

A look ahead

This week’s long list of updates will include the latest on retail inventories, the S&P CoreLogic Case-Shiller home price index, consumer confidence, pending home sales, the Institute for Supply Management’s manufacturing index, construction spending, vehicle sales, and the jobless rate, which is expected to tick up to 3.6 percent from September’s 3.5 percent. In addition, there will be more earnings news, and the government will release its first estimate for third-quarter growth, forecast to come in at 1.6 percent after 2 percent in the second quarter And the Federal Reserve meets this week with investors widely expecting the Fed to cut its benchmark rate for the third time this year.

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.