Weekly market update
It was a mixed week for the major averages last week as the Dow and S&P 500 finished in positive territory while the NASDAQ and Russell 2000 finished lower.
Stocks were all over the place last week as investors digested better than expected earnings, yet stocks weren’t richly rewarded as most reporting fell, especially banks and other financial names. Rising rates, the ongoing trade disputes with China and the new saga playing out with Saudi Arabia captured investors attention and in turn put pressure on stocks. And, let’s not forget about the ongoing troubles in Europe as Italy’s budget problems are going to turn into Europe’s problems.
Bond yields pulled back from the highest levels we’ve seen in almost a decade. This also played a role in souring investor’s optimism.
There are some other issues that are concerning. This market is breaking a lot of rules:
- We aren’t holding breakouts or breakdowns.
- We’re seeing good earnings but weak stock prices.
- We’ve seen hot sectors literally turning cold overnight.
Turning to the economy, the big picture on the economy is that it is on solid footing. Sure, there are obstacles out there, but, by-and-large, we’re clicking along pretty good. But, as we’ve witnessed, things can change literally overnight and danger lurks, namely a weak housing market and weakness in stocks.
The minutes from the Federal Open Market Committee’s September meeting continued to weigh on the bond market the day after its release. U.S. Treasuries sold off after the minutes showed Fed officials were mostly in favor of raising rates into restrictive territory, that is, until economic growth began to slow.
Before the minutes, several FED presidents had alluded to the growing consensus among the committee for rates to push higher above neutral, the theoretical level of monetary policy that neither slows or accelerates growth.
Despite concerns of a trade war and softer global expansion, central bankers appeared confident that growth and inflation would remain robust enough to allow the central bank to hike rates in a steady fashion.
While the data remains supportive of ongoing rate hikes, there is no shortage of potholes in the path ahead, particularly on the international front. Across the pond, Brexit negotiations remains a source of uncertainty, while recent developments in Italy have also become a major cause of concern. The EU Commission has determined that Italy’s draft budget is in serious breach of EU budget rules, and may reject it. The Rome-Brussels rift, which has sent Italian bond yields skyward, will bear close watching this week with Italy expected to reply to the commission by Monday. Chinese economic growth is slowing and policymakers there have a tough balancing act between deleveraging and maintaining adequate growth. A sour exchange between trade representatives of the EU and U.S. last week also reminds us that the Trans-Atlantic trade truce rests on feeble foundations. All told, plenty of risks remain and it won’t be an easy path to navigate.
So, stay tuned and we’ll keep you posted.
