10/22/2018
The S&P 500 managed to arrest its three-week slide last week but had to rely exclusively on a one-day gain to do it. The index barely edged higher, rising just 0.02 percent, and it took a 2.1 percent surge on Tuesday to accomplish even that. Stocks have fallen in 10 of the past twelve trading days and sit 5.6 percent below the September peak. The VIX index of implied volatility has moved higher recently. After averaging 13 throughout the third quarter, so far this month it has averaged 18, and currently resides at 19.

The S&P 500 ended the week just fractionally below its 200-day moving average, suggesting that uptrend remains largely intact. But the mood in the market seems to have taken on a somewhat more cautious tone recently, as concerns have shifted beyond the immediate questions regarding third quarter earnings and the likely longevity of the U.S.-China trade spat, to questions about the broader outlook for global growth.

The Fed minutes from the September meeting reinforced the view that it has every intention of proceeding along the current path of gradual, steady rate increases, with little evidence of sympathy for the view that a pause in that process will be warranted soon. Already soft U.S. housing and auto markets will find little comfort in knowing that. In China, third quarter Gross Domestic Product (GDP) slipped to a year-over-year pace of 6.5 percent, softer than anticipated and the slowest since March 2009. Two weeks ago, the International Monetary Fund lowered its global growth forecast for both this year and next by 0.2 percent, citing trade tensions as a factor. Global Purchasing Managers’ Indexes (PMI), which peaked earlier in the year, continued to decline in September. And the OECD index of leading economic indicators points to, in its words, “easing growth momentum.”

Third Quarter Earnings Coming in Strong; Stocks in China Gaining Traction

Third quarter earnings are so far coming in as expected. The anticipated growth rate is currently at 19.5 percent according to Factset, fractionally better than when the quarter began. Anecdotally, compared to the second quarter, more companies are mentioning trade as having a minor negative impact, but overall the impact is still relatively muted. That could change as the focus of earnings season shifts away from the financial sector to include more companies directly exposed to trade in technology and industrials. Among the companies expected to report this week are 3M, McDonald’s, Caterpillar, United Technologies, Boeing, Ford, Amazon, Alphabet and Intel.

Stocks in China have been among the worst performers this year, with the Shanghai Composite index down 23 percent through Friday. But this week so far is a different story, as the index jumped by 4.1 percent on Monday, following official comments in support of economic growth, although those efforts have yet to show up in the official data. That optimism has extended to trading in Europe, and U.S. futures are pointing to a higher open.

Investors Keeping an Eye on Bond Yields and Third Quarter GDP

Bond yields have once again drifted higher. After the initial spike higher on October 5 to 3.23 percent following comments from Fed Chair Powell, the yield on the ten-year Treasury note pulled back down to 3.15 percent by October 11. But following the release of the Fed minutes last Wednesday, yields resumed their climb, reaching 3.20 percent in early trading this week. The two-year Treasury note yield has now reached 2.91 percent, its highest level since June 2008. The slope of the yield curve between the two and ten-year Treasury notes narrowed two basis points to 28. That is down from the recent peak of 34 two weeks ago, but higher than its late August low of 19 basis points. High yield credit spreads narrowed fractionally on the week. Interestingly, the Fed minutes from September made mention of concern among some Federal Open Markets Committee (FOMC) participants of the loosening of terms and standards, and growth in the leveraged loan sector. 

Topping the list of this week’s domestic economic reports is the advance look at third quarter GDP. According to Bloomberg the consensus expectation calls for growth of 3.4 percent. If so, it will represent the best consecutive two quarter stretch since the middle of 2018. Other scheduled reports include flash PMIs, new and pending home sales, durable goods orders and consumer sentiment. The European Central Bank meets this week amidst ongoing concern over the fiscal health of Italy and its proposed budget. Flash PMIs for the Eurozone are also scheduled.

Lastly, expect politics to increasingly dominate the airways, as the U.S. mid-term election is now just two weeks away.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

Past performance is not a guarantee of future results.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
 
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

The Organization for Economic Co-operation and Development’s (OECD) composite leading indicator (CLI) is designed to provide early signals of turning points in business cycles showing fluctuation of the economic activity around its long-term potential level. CLIs show short-term economic movements in qualitative rather than quantitative terms.

The information and opinions in this article are compiled from third party sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor.

Indexes are unmanaged and are not available for direct investment.

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