| Friday's Headlines 1. Markets End Week on a High Note 2. Trade Talks Spark Optimism 3. 2019 is Shaping up to be a Historic Year 4. What to Expect Next Week Markets Closed
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Markets Today
Better than expected earnings and hopeful comments on the progress of the U.S.-China trade talks cheered up investor sentiment on this final day of the week, pushing the S&P 500 to near record levels.
GM and the United Auto Workers Union also reportedly approved a new labor contract, putting an end to a 40-day strike.
It's the third straight week of gains for the broader market, which has been propelled by perceived progress between China and the U.S. and strong performance by some of the biggest stocks in the market, like Microsoft and Intel.
What's curious, and a bit frightening, is that the stock market is up a lot more than corporate profits suggest it should be. If the stock market is essentially a reflection of investors' perception of the future profitability of the stocks in it, we are witnessing a broad divergence between market returns and corporate profits.  The last times this has happened coincided with recessions in 2008-09 and 2001. That doesn't mean we are headed for a recession, but it's something to keep an eye on as more companies report their results in the coming weeks.
To date, about one third of the S&P 500 has reported results from the prior quarter, and earnings are down about 3.5%, as expected. But 78% of the companies that have reported to date have beaten forecasts. It's the ones that don't and that warn of more pain ahead that we need to worry about. If more companies like Caterpillar lower their fourth quarter guidance, the stock market might seem way overvalued relative to corporate performance.
Trade Still Steals the Headlines The Office of the U.S. Trade Representative said today that the U.S. and China are close to finalizing details of Phase One of their trade agreement. The favorable trade winds have boosted industrial stocks - even those like Caterpillar and 3M. Good news on trade is great news for multi-national industrial and manufacturing companies.
Here's the Dow Jones Industrials since the beginning of the year, up more than 15%.  The Dow's gains are hard to believe, given the hand wringing over the trade war, and even harder to believe given the steep correction across all markets last Fall, which sent all markets into Bear Territory. Even with that, the Dow Industrials are up more than 9% over the past year.
charts courtesy YCHARTS  Banner Year Across Major U.S. Assets (So far...) 2019 is shaping up to be a banner year across major U.S. asset classes. To be sure, most investors didn't start investing on January 1, 2019. But, if the baby-bear market scared you out of the market late last year, you might've missed the run in these assets in 2019:
It's very rare to see stocks, U.S. treasurys, and gold all rising double-digits in the same time frame given that treasurys and gold are typically considered safe assets when the stock market looks rocky. In fact, you have to go back to 1993 to see the last instance of that happening. We shouldn't count on seeing this happen again, but since none of us can predict the future, 2019 has been a great lesson in maintaining a diversified portfolio, and not trying to time the market.
The rise in stocks can be attributed to the lowering of interest rates by the U.S. Federal Reserve, which typically makes bonds less attractive compared to stocks due to bonds' lowered yields. But the broad overhang of global economic uncertainty that has been amplified by the U.S.-China Trade War has pushed investors into treasurys and gold, even as stocks climb back to record highs. Trust me... it's strange.
The strength of the U.S. consumer has also helped underpin the stock market rally. As we know, U.S. consumers account for around 70% of GDP, and we've been giving our credit cards a workout over the past two years. That's been a big boost to retail stocks - and not just Amazon. Amazon was thought to be a category killer, and while it has killed a lot of its competitors, Target, Costco and Walmart are doing just fine this year, thank you very much.
chart courtesy BeSpoke Investments  Consumers are Still Hanging On No surprise here... Consumers are still relatively confident about the economy, according to the most recent University of Michigan Consumer Confidence Survey, which was the final report for September.
Confidence has declined from its 2018 highs, but not by much. We saw that in the preliminary report a couple of weeks ago, and the final, released this morning, made it official. Consumers surveyed were far less anxious about the trade war than they were in August. Low unemployment, low interest rates, and low gas prices are also confidence boosters, and we've had all three in this country.  What to Expect Next Week:
Monday: Chicago Fed National Activity Index (Sept.) Dallas Fed Manufacturing Survey (Oct.) Advance Trade in Goods (Sept.)
Tuesday: Consumer Confidence Index (Oct.) Pending Home Sales (Sept.) Case-Shiller home prices (Aug.)
Wednesday: ADP National Employment Report GDP (3rd Quarter 2019, Advance Estimate) FOMC Rates Announcement
Thursday: Personal Income and Expenditures (PCE) (Sept.) Core Inflation (Sept.) Consumer Spending (Sept.)
Friday: Motor Vehicle Sales (Oct.) ISM Manufacturing (Oct.)
Rate Announcements: Rate Cuts Likely Next Wednesday the Federal Reserve will announce the new fed funds rate. There is near-universal consensus that interest rates will be cut by a quarter of a percent from 1.75%-2.00% to 1.5-1.75%. If this happens, it would be the third rate cut in a row, the first of which happened this summer.
One notable thing regarding this potential rate cut is that there could be up to three dissenting voices opposing the rate cut on the Federal Open Markets Committee (FOMC). This would be an unusually high number of dissenters, and may indicate that there would be significant opposition to further rate cuts.
Earnings Season: 3 More FAANGs Following up on Amazon's (AMZN) earnings last week, three more of the FAANG companies report earnings next week. Alphabet (GOOGL) releases earnings on Monday, and both Facebook (FB) and Apple (AAPL) announce on Wednesday. Facebook has dominated the news recently after Mark Zuckerberg testified before congress this Wednesday about Facebook's potential cryptocurrency, Libra. In addition, the problem of Facebook spreading fake news has again arisen as regulators have tried to figure out how to fight fake news without limiting free speech. Alphabet has had its own share of regulatory issues, having confirmed in September that the Department of Justice was pursing an antitrust investigation into the tech giant. For more on these upcoming earnings, see our previews for Apple earnings, Facebook earnings, and Alphabet earnings.
Brexit: Another Missed Deadline After rejecting Boris Johnson's Brexit deal last weekend, Parliament gave initial approval to it later in the week. They then rejected his timeline for the deal, which would have had the U.K. exit the EU by October 31st. This rejection forced Boris to go back to the EU and ask for another extension, which the EU is likely to grant. Now Boris Johnson is pushing for an election in November to try and bolster his majority, but parliament has balked so far at giving it to him. So be on the look out for possible votes on a UK general election.
(chart courtesy YCHARTS)  Medical device maker Resmed is up 12.9% on an earnings beat. Other companies up on earnings beats are floor maker Mohawk Industries, which rose 10.9%, and computer chip maker Intel, which gained 8.2%  Real estate investment trust Ventas dropped 9% on unsatisfactory earnings. Lithium producer Albemarle fell 8.4% as lithium prices put pressure on its earnings. Utilities corporation Edison International also lost 8.4% as California wildfires continue to worry investors concerned about potential liability that has hurt fellow utility PG&E. Word of the Day Michigan Consumer Sentiment Index (MCSI) The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of U.S. consumer confidence levels conducted by the University of Michigan. It is based on telephone surveys that gather information on consumer expectations regarding the overall economy.  Today in History October 25, 1971 Today in 1971 the Taiwan-based Republic of China (ROC) was expelled from the United Nations (UN), and its seat taken by the mainland-based People's Republic of China (PRC). The People's Republic of China also gained a permanent seat on the UN security council. The ROC was first admitted to the UN in 1945, when it controlled most of China, but by 1949, it had been forced to withdraw to Taiwan, with the PRC controlling mainland China.
Source: https://learning.blogs.nytimes.com/2011/10/25/oct-25-1971-peoples-republic-of-china-in-taiwan-out-at-un/
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Friday, October 25, 2019
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