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Weekly Update

Market Summary

Strong U.S. economic growth data and more third quarter corporate earnings announcements coming in above expectations were not enough to counter negative sentiment that caused a further sell-off in equity markets this past week. Investor concerns of peaking corporate profit growth and tightening monetary policy have led many to unwind positions in stocks, particularly in crowded growth stocks, in favor of safe haven assets like U.S. Treasury bonds. The NASDAQ index officially entered correction territory with a 3.8% loss for the week, as it is now off almost 12% from its 52-week high, while the S&P 500 and Dow Jones lost 3.9% and 3.0% for the week (down 9.6% and 8.4%, respectively, from their highs). As a result of the heightened demand, the 10-year U.S. Treasury yield dropped 0.12% to 3.08% to close out the week.

As of Friday, almost half of the S&P 500 constituents have reported third quarter earnings with a blended earnings growth rate of over 22.5% from the third quarter of 2017, according to FactSet, which is higher than the original expectations of around 19% growth. Despite the recent decline in sentiment, corporate earnings growth is expected to remain healthy in 2019, with a Wall Street analyst consensus annual growth rate of 9.8% per FactSet, albeit down from the 20%+ clip seen in 2018.

A positive takeaway from last week’s market news was the strength of U.S. economic growth in the third quarter, with GDP growing 3.5% over the second quarter (3.0% year-over-year), which was beyond expectations of 3.3% growth. The upside surprise was largely driven by high consumer spending growth, which more than offset the drag from weak business capital investment and declining residential home investment. Investors will be paying close attention to employment data later this week to see if the tightening labor market will begin to pressure up wages and overall inflation.

Economic Highlights: 

Inflation: September’s Core Personal Consumption Expenditure Index or PCE (the Federal Reserve’s preferred inflation indicator) was in-line with to slightly above consensus estimates, with 0.2% month-over-month growth compared to estimates of 0.1%, but year-over-year growth was flat at 2.0%, which is right at the Fed’s target rate.

Oil: Crude oil spot and future prices declined notably last week due to increasing Russian crude oil output as well as remarks from the Organization of Petroleum Exporting Countries (OPEC) about ramping up output to offset supply loss from Iranian sanctions. The outlook of declining prices pressured a sell-off in energy stocks, with the S&P 500 energy sector losing 7.1% last week.

US Economy – The Week Ahead

Tuesday 10/30/2018

  • S&P/Case-Shiller Home Price Index Year-over-Year Growth – Consensus Estimate: 5.9%, Prior Month: 5.9%

Wednesday 10/31/2018

  • ADP Employment Survey – Consensus Estimate: 189K (-17.8% MoM), Prior Month: 230K (36.9% MoM)

Thursday 11/1/2018

  • Initial Jobless Claims – Consensus Estimate: 212,500 (-1.2% WoW), Prior Week: 215,000 (2.4% WoW)
  • ISM Manufacturing PMI – Consensus Estimate: 58.9 (-1.5% MoM), Prior Month: 59.8 (-2.4% MoM)
  • Construction Spending Month-over-Month Growth – Consensus Estimate: 0.1%, Prior Month: 0.1%

Friday 11/2/2018

  • U.S. Unemployment Rate – Consensus Estimate: 3.7%, Prior Month: 3.7%
  • Hourly Earnings Growth Year-over-Year – Consensus Estimate: 3.1%, Prior Month: 2.8%
  • Trade Balance – Consensus Estimate: -$53.4B (-0.4% MoM), Prior Month: -$53.2B (-14.9% MoM)
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