Macro View

Daily Insights

  • Selloff thoughts. Stocks suffered their biggest one-day decline since February, as a combination of higher bond yields, U.S./China tensions, nervousness over the upcoming midterm elections, six straight months of gains, and worries about peak margins this earnings season all added up to a big sell-off. We understand these bouts of volatility are unsettling, and below are some of the points from our special blog post that provides our thoughts on the selloff:
    • The S&P 500 Index had gone 74 consecutive days without a 1% move-the 10th longest streak in history. In other words, equity markets were wound tight and some type of volatility was likely.
    • October is known for spectacular crashes (1929, 1987, and 2008), but in reality it’s about average in terms of returns. What it really should be known for is volatility. Incredibly, no month has seen more 1% changes (up or down) than the month of October for the S&P 500 going back to 1950.
    • The economy is in excellent shape. Consumer spending is growing solidly, consumer and business confidence is high, the job market is quite strong, manufacturing surveys are near record levels, and by historical standards, interest rates are still fairly low.
    • Pullbacks are normal. Even though stocks tend to average a 7-8% gain each year, they also tend to have three to four pullbacks each year (5-10% drops) and at least one 10-20% correction. We got both earlier this year but history tells us we may get more. Still, we see the potential for a year-end rally.
    • Corporate profits remain quite strong. FactSet consensus expects a 21% increase in S&P 500 earnings per share in Q3, supported by strong U.S. economic growth and tax cuts. Over the past month, forward earnings estimates for the S&P 500 have risen by about 1%, according to FactSet. The tariff impact has been minimal to date and repatriation has given companies a huge cash hoard that they may invest in growth or return to shareholders.
    • All of our favorite leading indicators point to continued economic growth, including the Leading Economic Index. As our Recession Watch Dashboard indicates, we see only early signs of excesses that have ended past economic cycles, such as excess leverage, over-spending, or extreme overconfidence. Even the yield curve has steepened some in recent weeks, a positive signal. We have a market-savvy Federal Reserve Chair who won’t take a yield curve inversion lightly.
  • Lower-than-expected inflation buoying stocks.Inflation data out this morning is helping to ease the selling pressure on stocks as the Consumer Price Index came in weaker than expected. The data show prices rose 2.3% in September vs. the year-ago period, below the 2.4% reading analysts expected and the 2.7% figure in the prior month. Major U.S. indexes subsequently moved off their earlier lows as Treasury prices rose, pushing the yield on the benchmark 10-year note lower.

Monitoring the Week Ahead

Click Here for our detailed Weekly Economic Calendar

Thursday

  • CPI Report (Sep)
  • Initial Jobless Claims (Oct. 6)
  • China Trade Balance (Sep)
  • China Imports/Exports Data (Sep)

Friday

  • Import Price Index (MoM, Sep)
  • Export Price Index (MoM, Sep)
  • Eurozone Industrial Production (Aug)

 
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Index data obtained via FactSet

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