Week 41 Sitrep

It was another choppy week for stocks in both the S&P 500 Index as well as the broader global indexes. We continue to discuss earnings growth, economic growth and political influences as being the three major drivers of stocks. This past week saw news around economic growth as a significant contributor to market weakness. We will share a brief synopsis below of each of the three drivers and their current influence on the stock market.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/7/19

The stock market started the week lower when a key economic survey for manufacturing came in weaker than expected. The market continues to seek evidence as to whether the economy is slowing to the point of recession. A second economic report surfaced Wednesday that sent the markets even lower. However, on Thursday, the stock market bottomed mid-day at a key technical support level and proceeded to move higher. Friday saw the weekly jobs report bring welcomed news as the unemployment rate continues to be recorded at the lowest levels since 1969.1 The S&P Index ended up down modestly for the week.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/7/19

The month of October appropriately brings concerns over market volatility. Our friends at Bespoke Investment Group reminded us this week that in the past October has been the most volatile month of the year on average going back to 1928. By looking at the spread between each month’s closing high and low, Bespoke determined that the average across all months see a range of 6.41% between high and low closing prices during the month. The month of October has seen a spread significantly higher on average, as much as 8.25%. The next closest month is November with an average range of 6.96%.2

Source: Bespoke Investment Group, The Bespoke Report, 10/4/19

Corporate earnings season begins later this week and we continue to see analysts lowering estimates for earnings expectations. However, there are some important trends we need to acknowledge that affect current earnings growth. When analysts give estimates for earnings, they are comparing current earnings to the earnings we saw at this time a year ago. Earnings growth is usually quoted in terms of “growth over the prior year”. Earnings in the 3rd quarter of 2018 were exceptionally strong due to the corporate tax cuts from the year before. A comparison of earnings in the 3rd quarter of 2019 will be very difficult since we do not have a current driver of expanded earnings like a tax cut.

According to Factset Insight, consensus earnings estimates for the 3rd quarter of 2019 have been reduced by 3.6%. Factset also notes, however, that the average decline in earnings estimates over the last 15 years has been 4.6%. Thus, we do not see the current estimates to be alarming. Factset also notes that there is not a strong correlation between future stock prices and lower earnings estimates.3

Source: Factset Insight, John Butters, 10/4/19

Bespoke Investment Group notes that historically, lower earnings estimates from analysts can provide easier opportunities for companies to outperform when they announce their actual earnings. For better or for worse, the energy and materials sectors have seen the largest declines in earnings estimates.4

The U.S. economic outlook came into question last week when the ISM Manufacturing Survey reported much weaker than last month. In fact, the figures were the weakest since 2009.5 However, the ISM survey is considered soft data since the survey is seeking personal sentiment of various manufacturing entities. Bespoke Investment Group had an interesting quote about the survey:

There’s no question ISM Manufacturing was very soft this week. What’s more likely is that the ISM survey is overplaying the trade war narrative (emphasis added) that was so evident amongst comments from respondents; a cross-check with the KC Fed’s index of new export orders for manufacturers in that district shows ISM Exports way out of line. Keep in mind, there are other reasons to assume ISM has gotten carried away. Manufacturing production is up three of the past four months and the 3m/3m change (which ISM tends to correlate well with) is positive presently. Taken together, we assign a low likelihood that the ISM survey is painting an accurate picture. (emphasis added)

Source: Bespoke Investment Group, The Bespoke Report, 10/4/19

We have recently received economic reports that show global economic activity is still, in fact, increasing. The most recent Markit Global Manufacturing reports that global growth has accelerated two months in a row for the first time since December 2017. Bespoke shares that this increase ends a 15-month streak of month-over-month declines.6 One outcome of increasing economic growth is that we should see corporate earnings reflect that increase over the next two quarters.

Finally, we continue to watch monetary and fiscal policy for impacts on the stock market. Even though both are considered part of the economic outlook, we often look at them separately because of the immediate effect they can have on stock prices. Monetary policy includes the policy decisions of the Federal Reserve and how those decisions impact the markets. A simple example is when the Fed decides to change short-term interest rates as they did in September 2019. Fiscal policy reflects the policies of the President and Congress and how they impact the markets. An example of fiscal policy would be the tax cuts passed in December 2017.

The latest monetary policy decisions continue to encourage investors that the Fed is aware of the risks with slower economic growth. The Fed announced at their September meeting a plan to continue to keep interest rates accommodative and provide liquidity for the markets.7 Many analysts believe the Fed will offer lower interest rates at future meetings in 2019 and 2020, which is historically positive for the stock market.

The big market mover in the last few months, however, is fiscal policy. The current issue has been the new trade agreements the U.S. has drafted with Europe, Japan, Canada and Mexico. The general opinion from analysts is that these new agreements with our largest trading partners will be positive for economic growth. The impending trade agreement with China has been a challenge for the markets throughout 2019, however the trade meetings scheduled for this week have given the markets optimism. Our investment committee believes the market will benefit from the progress being discussed this week.

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


1. J.P. Morgan Asset Management, Weekly Economic Update, 10/7/19
2. Bespoke Investment Group, The Bespoke Report, 10/4/19
3. Factset Insight, John Butters, 10/7/19
4. Bespoke Investment Group, The Bespoke Report, 10/4/19
5. Bespoke Investment Group, The Bespoke Report, 10/4/19
6. Bespoke Investment Group, The Bespoke Report, 10/4/19
7. Bespoke Investment Group, The Bespoke Report, 10/4/19