11/05/2018
After establishing a new closing low for the recent downturn last Monday, U.S. equities staged a strong three-day rebound, pushing the S&P 500 to a 2.4 percent gain for the week and back into positive territory for the year, up 1.9 percent. It was the best weekly gain for the index since March and could have been even better if not for a modestly disappointing earnings report from Apple that triggered a tech-led selloff on Friday.

Beyond the rise in equities, there were other signs of a tentative rise in risk appetites last week, including a drop in volatility. After rising to an intraday high of 27.8 on Monday, the VIX index fell back to 19.5 at week’s end, although that remains elevated relative to its average for the year of 15.7. The yield on the ten-year note surged higher by 13 basis points to close at 3.21 percent, just below its previous cycle high of 3.23 percent on October 5. The two-year note traced a similar path, rising 12 basis points from the previous week’s close to end the week at 2.92 percent, also a cycle high. And high yield spreads narrowed after widening sharply the previous week. Overseas equity markets rose sharply as well. The EuroStoxx 50 index climbed 2.5 percent in euro terms, the Nikkei jumped 5.0 percent in yen, and the MSCI EM index surged 5.4 percent, including a 3 percent gain in the Shanghai Composite index.

Third Quarter Earnings and October Jobs Report Show Encouraging Signs

No doubt some of last week’s rebound came in response to oversold conditions that prompted some bargain hunting. Third quarter earnings continue to exceed expectations as well. Three quarters of S&P 500 companies have now reported, and the expected aggregate growth rate has climbed to 24.9 percent, according to Factset. But also contributing to the better tone were reports that the UK and EU had reached a tentative agreement on the status of financial services after Brexit, giving a boost to the pound. And talks between Presidents Trump and Xi offered at least a flicker of hope regarding the trade dispute with China, although the White House later in the week downplayed the extent of any progress. And a speech by Xi on Monday of this week contained little hint progress either.

The October jobs report showed ongoing strength in the labor market. The economy created 250,000 new non-farm jobs, a strong rebound from the September revised total of 118,000, putting the three-month average gain at a solid 218,000. At the same time, the participation rate climbed to 62.9 percent, leaving the unemployment rate unchanged at 3.7 percent. Year-over-year growth in average hourly earnings rose to 3.1 percent, its highest since April 2009. But the extent of the rise was taken in stride because the modest 0.2 percent monthly increase in October replaced a 0.2 percent decline from last October in the calculation. And earlier in the week the core PCE deflator showed a steady 2.0 percent year-over-year increase in September. Overseas, the economic data was less encouraging, however. Growth in the Eurozone disappointed in the third quarter. In China, the pace of manufacturing activity just barely managed to remain above the growth line, and industrial production declined in Japan.

This week’s domestic economic calendar includes flash PMIs, ISM services, producer prices, and consumer sentiment. The Fed also meets, although little change is expected. And another roughly 15 percent of S&P 500 companies report earnings.

What to Expect from Midterm Elections

All of that will, of course, take a back seat to Tuesday’s midterm elections. Polls and prediction markets suggest that control of the Senate will remain Republican, while Democrats are expected to regain control of the House. But neither of these outcomes are a foregone conclusion, especially given the high degree of interest expressed by registered voters in general and among those considered likely to vote, suggesting a higher-than-typical turnout for a midterm election. The outcome will have implications for the likelihood of legislation regarding tax policy, healthcare, prescription drug pricing, infrastructure spending, and immigration policy among others. History tells us that the president’s party typically, although not always, loses seats in Congress in the midterm election. Losing seats, however, is not necessarily the same as losing control of one or both houses of Congress. And as we have learned with recent experience, polls are not always accurate predicters of results. The Democrats would need to gain 23 seats out of approximately 75 that are considered competitive to take the House. In the Senate, 35 seats are up for election, including two special elections. Democrats would need to gain two seats to take control, but that is not considered likely. There are also a number of elections at the state level, including 36 governorships, important in part due to the upcoming congressional redistricting following the 2020 census.

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 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 EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list. 
 
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
 
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
 
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.

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.

Ameriprise Financial Services, Inc. Member FINRA and SIPC.