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By Pete Biebel, Senior Vice President

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Both the S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) came through the week with small net gains despite a lengthening list of bad news headlines from around the world.  In addition to growing geopolitical tensions, those headlines have recently included more signs of slowing worldwide economic growth.  Data out last week showed that economic growth in China slowed to its lowest rate in nearly thirty years.  The German economy may already be in a recession.  The International Monetary Fund reduced its estimate of global economic growth to 3.0%, its lowest level since the financial crisis.  On Wednesday we learned that U.S. Retail Sales in September decreased by 0.3% when a 0.2% increase had been expected.

Thankfully, last week was the first big week of the new earnings season.  While the comparisons to year-ago earnings were not expected to be very pretty, they actually turned out to be quite beautiful.  About eighty percent of the S&P 500 companies that reported last week had earnings that beat the consensus estimates.  That was more than enough to keep traders enamored with the market overall.

The Dow Jones Industrial Average (DJIA) trailed its broader peers.  With just thirty component stocks, DJIA is prone to diverge from the broader COMP and SPX especially during earnings season.  DJIA ended the week with a small net loss, but that underperformance was caused in no small part by significant non-earnings news in some of the DJIA component companies.

The first crush of earnings love came Tuesday morning.  Pre-opening, quarterly reports from Financial and Healthcare companies were the darlings that day.  The major averages held gains of more than 1% through the early hours of trading.  The rally lifted SPX to the 3000 level for the first time since late-September.  But, if traders were humming “Don’t Be Cruel” about the 3000 barrier, that level once again proved to be “Heartbreak Hotel.”  SPX ended Tuesday near 2996 and slumped to 2990 on Wednesday.

Another wave of earnings adoration came Thursday morning, and again Financials and Healthcare stocks were the sweethearts.  SPX spiked above the 3000 level in the opening minutes of trading, reaching its high of the week near 3008 in the first half-hour, only to ease lower through the balance of the session and close near 2998.

Friday morning brought the news of slowing growth in China.  The Shanghai Composite had its largest loss in more than a month that day, falling 1.3%.  The high on SPX that morning was exactly 3000, but it spent most of the session in the red and ended the week near 2986.

On the strength of their reaction to earnings news, the Financials and Healthcare sectors each gained about 2% give or take for the week and were easily the strongest of the U.S. equity sectors.  Four of the S&P industry sectors ended the week with a net loss.  In particular, the Energy and Technology sectors were not feeling the love; the Technology sector lost about 0.8% for the week and Energy was down by a little more than 1 ½%.

One factor other than earnings that had a significant impact on last week’s leading sectors was the declining Dollar.  The value of the U.S. Dollar skidded steeply against other currencies late last week.  The Wall Street Journal U.S. Dollar Index was at its high of the year as the month of October began, but has dropped a full 2% in the past couple weeks with most of the loss coming last week.  It ended last week at its lowest level in three months.  The weakening Dollar helped a few international developed markets and a couple commodity sectors outperform most of the U.S. equity sectors last week.

Despite its modest gain, SPX still finished in the lower end of its range for the week.  Its close near 2986 leaves it less than 1 ½% below its record high of late-July.  So, with a little help from earnings reports or maybe a little good news on the trade war, the indices could easily be making new highs.  My guess is still that the higher high on SPX might be in the 3040-3050 range but probably not much higher.  Downside risk could increase substantially if SPX drops back below the 2940 level.

There’s a big opportunity for more earnings love this week as this will be the busiest week yet in the new earnings season.  The economic data on Thursday has the best potential to spur a market reaction as it could swing the odds of a Fed rate cut at next week’s meeting.  News on the trade war with China still seems to be the external factor to which the market is most sensitive.  More headlines on impeachment and Brexit will likely appear this week, but the market lately has seemed almost numb to that news.

Date Report Previous Consensus
Tuesday 10/22/2019 Existing Home Sales, SAAR 5.490mm  5.450mm
Richmond Fed Manufacturing Index -9  -9
Wednesday 10/23/2019 FHFA House Price Index, M/M +0.4%  +0.4%
Thursday 10/24/2019 Jobless Claims 214K  214K
Durable Goods Orders, M/M +0.2%  -0.7%
Durable Goods Orders, ex-Transportation, M/M +0.5%  -0.1%
PMI Composite Flash 51.0  50.9
New Home Sales, SAAR 713K  699K
Friday 10/25/2019 Consumer Sentiment 96.0  96.0


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October 21, 2019 |