U.S. stocks are trading higher this morning, after finishing up for the third straight week last week, closing near record highs. Corporate earnings continue to be the main driver behind this market, with third quarter earnings reports coming in above expectations. News flow around softening U.S.-China trade rhetoric has also been a tailwind for equities, with international markets benefiting the most. On Saturday, the Chinese Ministry of Commerce noted in a statement that negotiators had “agreed to properly resolve their core concerns” relating to Phase One of the trade deal which is “basically completed.” The expectation is for President Trump and his Chinese counterpart, Xi Jinping, to sign a pact when they meet in Chile next month.
This week, investors will also be paying close attention to the Federal Open Market Committee (FOMC) meeting on Wednesday, where the expectation is for a third 25bps rate cut, bringing the fed funds rate to 1.50-1.75%. According to Bloomberg, the odds of at least one cut before the year ends are 91%, with a 23% chance of another cut in December. As recent economic data has come in weaker, central banks around the world have responded with very accommodative policies or actions to attempt to keep the expansion going for longer. While we have seen manufacturing data come in weaker recently with core durable orders coming in flat for the third consecutive month, consumer confidence remains resilient, with the Michigan Consumer Sentiment survey rising 2.5% in October. At Haverford, we remain positive the resilient U.S. consumer will carry the economy through these uncertain times as business investment remains on hold until the trade fog clears up.
Investors will pay particular attention to Chair Jerome Powell’s speech to decipher what the next phase of the Federal Reserve’s actions will look like, as there is still a decent amount of uncertainty. Investors will be keenly interested in whether Powell signals an end to the easing cycle or potentially leaves the door open to more rate cuts in December or later. Either way, a cut has and will continue to be positive for equity markets in the near term. The not so great news is that, in the event that there is an economic downturn sometime in the near future, central banks will have less tools in their belts to stimulate economic activity.
Finally, this week will be the busiest on the earnings calendar with about 165 companies slated to report their business performance for the third quarter. So far, 40% of companies have reported earnings this quarter, with earnings down 3.1%, coming in better than the expectations of a 4% decline. The dichotomy between the U.S. and international markets remains with companies that have more international exposure (<50% of Revenues in U.S.) continuing to underperform their peers with less international exposure (>50% of Revenues in U.S.).