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Markets recover on shifting investor mindset

Summary

  • Equity markets rallied for the second straight week, largely reversing the weakness in August and bringing the S&P 500 Index to within 1.5% of an all-time high. Economic and trade uncertainty remains elevated, though sentiment is recovering, and investors are incrementally adopting a “glass half full” approach.
  • Payrolls rose at a disappointing 130k in August, with private sector growth the weakest since last February at 96k. The 1.3 million hires for the first eight months of the year was the weakest pace since 2010. Corporate executives are growing increasingly cautious, with a WSJ poll showing only 42% were optimistic on the economy, the lowest level in three years. Nearly half cited global trade tensions as a drag, though the biggest challenge continues to be the availability of skilled personnel. Not all data is weak, however, as the Citi Economic Surprise Index has turned positive for the first time since February, signaling that data is trending better than expected. This could signal that the pendulum may have swung too pessimistically on the outlook for the economy.
  • Rhetoric between the U.S. and China calmed in the past week, as conversations continue, and formal talks are being planned for October. Reports show that China offered to increase purchases of agricultural commodities last week if the U.S. limits export restrictions against Huawei and delays new tariff implementation. Trump has indicated a willingness to postpone the tariff escalation scheduled for December 15. Despite the improved tone, the two sides appear far apart on important issues, and equity markets will likely be whipsawed by trade news several more times before a deal is reached. While Chinese officials contend that growth is stable, recent trade data and private data suggest that the real picture is worse than the official data.

Other Topics

  • Central banks will drive the news cycle over the next two weeks, led by an ECB policy meeting this week. Most observers expect a 0.10% rate cut, and many expect a relaunching of QE (bond purchases). Two factions are developing, with German and Dutch officials opposing a major stimulus package, while others viewing it as necessary given the sluggish growth and global uncertainty. The FOMC meets the following week, and while a 0.25% cut is still the consensus, the odds of a 0.50% cut have largely disappeared. Through year-end, the odds of three or more additional cuts have remained relatively steady at 33%. The Bank of Japan also meets that week, and there are growing calls for incremental stimulus given the rise in the yen and disappointing growth. The “race to zero” for global currencies seems poised to continue.
  • Earnings estimates continue to be revised down, with analysts expecting a decline of 4% in the third quarter, following fractional declines in the first and second quarter. This would be the first three quarter losing streak since 2015-2016. While domestically-focused companies continue to show solid growth, companies with global exposure (i.e. technology and energy) could see double-digit declines on weak growth and the stronger dollar.
  • The odds of a no-deal Brexit took a dive last week as MPs voted in favor of a bill that would force PM Johnson to request a three-month delay if no deal is reached by October 19. They also rejected Johnson’s demand for a new election on October 15. Oddsmakers show the current odds of a hard Brexit on October 31 at just 14%. Meanwhile, GDP data in the U.K. surprised to the upside, with services sector growth at the best level since last November. Manufacturing data remains weak, and expectations are for GDP growth to by just 1.2% this year.

What to watch

  • Another active week of data will provide a broad view of the economy, including consumer credit on Monday, NFIB Small Business Index and JOLTS job openings on Tuesday, producer inflation Wednesday, consumer inflation on Thursday, and retail sales and consumer sentiment on Friday.

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Disclaimers

  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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