Weekly market update

The major averages finished the week mixed with the Dow and S&P 500 falling 0.88% and 0.30% respectively, but the tech-heavy NASDAQ was able to squeeze out a small gain of 0.57%.

It was not without a fair share of volatility as stocks fell sharply to kick off the fourth quarter as the ISM manufacturing index fell to its lowest levels since the great financial crisis (10 years), stoking a renewed concern about a recession and in doing so wiped out their entire gains from all of Q3.

On October 2nd, the next shoe fell. ISM non-manufacturing (services)—fell to its lowest level in three years. We were on track for our worst week of the year and all of a sudden, stocks turned on a dime and pushed higher even after the September jobs report came in below expectations. The Dow rose 750 points since we were shocked to learn that the manufacturing weakness is spreading to the services sector.

More on that jobs report—the September jobs report reflected underlying economic uncertainties. Positively, the unemployment rate dropped to a 50-year low of 3.5%, surprising economists expecting it to hold at 3.7%. Nonfarm payrolls rose 136,000, missing expectations, but exceeding the 120,0000 required to maintain the unemployment rate. Wages also disappointed as hourly earnings growth slowed to 2.9% YoY. In the Eurozone, August unemployment hit the lowest level since 2008. In my opinion, jobs growth is slowing because we are running out of people to fill the jobs out there—we have discussed this before.

And then there is this: As much that is going on with China/trade/tariffs, North Korea, the Middle East and now we want to slap tariffs on the EU. That’s right, the President wants to slap tariffs on a number of Airbus products and agricultural products. We can’t even get things done with Canada and Mexico.

One note on trade tensions with China—the importance of this week’s US/China trade talks can’t be overstated. Growth is clearly on a precipice. The manufacturing sector is in outright contraction and while other portions of the economy are holding in well, this discrepancy can’t persist forever.

Basically, my view of the global economy (or the US, or the Eurozone, etc.) boils down to this…will a bunch of little shocks add up to a BIG shock? It’s either lots of little shocks that are a sign of an impending BIG shock or look past the noise that is sending the wrong message.

Q3 earnings season kicks into full gear next week. Similar to the first and second quarters, slower global growth, lower oil prices, geopolitical uncertainties and a much stronger dollar are expected to weigh on earnings growth this quarter. Consensus estimates currently suggest that the S&P 500 operating earnings per share will contract by 1.4%. This is not a new phenomenon, as the previous two quarters earnings seasons kicked off with estimates calling for negative growth before closing the earnings season at 4% and 3.9% YoY respectively.

While overly pessimistic estimates heading into earnings season tend to be typical, this time may be different and could end this quarter with flat or to an outright contraction in earnings. The reason is because Q3 of 2018 we saw robust earnings and margins and those levels are likely to be maintained this year.

This week we will get the latest read on inflation with the Producer Price index and the Consumer Price index and they are likely to remain benign. We will also get the latest jobs openings and labor turnover that we’ll be watching and the latest read on consumer sentiment—which is likely to fall as trade uncertainty and geopolitics have taken their toll on consumer psyche, so stay tuned and we’ll keep you posted.

Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC

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