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Recession worries put equities in holding pattern

Summary

  • Economic data has been mixed in recent weeks, though the negative reports (i.e. PMIs last week) are getting far more attention than the beats, which is emblematic of the “glass half empty” view of investors. We have seen a volatile, yet directionless equity market since the Spring, based largely on investor emotion. We are likely to remain in this range until we see a catalyst to drive us higher (China trade deal, earnings inflection), though the fourth quarter is the best seasonal quarter dating back to 1928.
  • The IPO market has struggled, as several high-profile “unicorn” offerings have disappointed. Recent issues are trading up 5% from the IPO, lagging the S&P 500 gain of 18%. This is emblematic of the market shift to lower-risk areas, but also a sign that investors are becoming more discerning and demanding for IPOs. Some fear that this is reminiscent of the technology bubble, though the weakness is more focused on a small number of names, and not a sign of broader excesses in the market.
  • China talks resume this week, with mixed rhetoric in recent days a microcosm of the developments and interpretations dating back to last year. There is growing consensus that China may hold out, trying to “run out the clock” on the Trump administration through next November. These dynamics are changing, however, as Elizabeth Warren emerges and Joe Biden fades. Warren is running on populist policies and could be as challenging an adversary to the Chinese than Trump, which could impact their negotiations.
  • We are more than a week from the start of third-quarter earnings season, and the current expectation is for a 4% drop in profits (would be worst quarter since 2016), driven by the strong dollar and sluggish global economy. The technology sector has seen the largest negative revisions. The current consensus shows 11% growth for 2020, which has been fairly stable this year. This is critical to watch, as double-digit growth next year could be the catalyst necessary to break higher, though deterioration would be a headwind.
  • The sluggish PMI data and general macro worries has driven the outlook for additional rate cuts this year. The odds of an additional rate cut this year jumped from 66% to 88% last week, and the chances of two spiked from 18% to 40%.

What to Watch

  • Inflation data highlights this week’s economic slate, with PPI on Tuesday and CPI on Thursday. Other important releases include consumer credit, JOLTs job openings, and consumer sentiment. The minutes from the recent FOMC meeting are released on Wednesday.

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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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