Reduced geopolitical tensions and positive earnings bode well for the market

Trade tensions with China are reduced with indications that a phase-one deal might soon be signed. The U.K. also has a Brexit deal in place which reduces uncertainty for Europe’s economy. We are also halfway through earnings season with earnings coming in better than expected.

Source: Janney ISG, Bloomberg. Data as of 10/25/19.

While global industrial production has been weak for the past year, the preliminary October business surveys suggest that the slowdown may be ending. Global central banks have been aggressively easing monetary policy which should ultimately help improve economic activity (housing is already benefitting from lower interest rates). Cyclical sectors (including energy, technology, industrials, and financials) outperformed last week which is also a positive signal for stocks.

U.S. Economic Data Remains Consistent with Slower but Positive Growth

The major U.S. economic news last week came from the preliminary October business surveys, state indicators, and consumer confidence. All of which remain consistent with slow, but positive, economic growth.

While September’s headline durable goods report was disappointing, much of the weakness was in the volatile transportation sector (likely transitory influences, with Boeing orders continuing to move down following a July surge and motor vehicle orders likely held back by the GM strike that began in mid-September). The more forward-looking IHS Markit Flash Composite PMI Output Index (a timely business survey) signaled the sharpest increase in business activity since July. The latest reading pointed to another gradual recovery in output growth from the three-and-a-half year low seen in August. Encouragingly, manufacturing companies recorded the sharpest increase in new business volumes since April.

The Philly Fed State Coincident Indexes rose in 39 states in September, fell in eight, and were stable in three. This is historically consistent with slower, but still positive, economic growth. Meanwhile, weekly jobless claims continue to signal a healthy labor market with initial claims falling to 212,000. This timely economic indicator continues to hover near historically low levels.

The Michigan Consumer Sentiment Index remained at a healthy level, led by a solid assessment of current conditions, as consumers haven’t lost confidence in the current expansion. However, the index peaked in early 2018, and it’s year-over-year momentum has shifted down, which is consistent with slower economic growth into year-end.

Global Economic Conditions Remain Weak

The ‘flash’ IHS Markit Eurozone Composite PMI (a timely business survey) rose marginally in October to signal the second-smallest expansion of output across manufacturing and services since the current upturn began in July 2013. European optimism continues to be impacted by global trade tensions and Brexit-related worries.

While Japan’s economy hit a widely expected bump because of the consumption tax increase, which took effect during October, manufacturing new orders continue to decline as trade tensions and global economic weakness restrict exports.

Earnings Season Remains Positive

With about 47% of the S&P 500 stock index having reported third-quarter results, earnings are beating by 4.8%, with 73% of companies exceeding their bottom-line estimates. This compares to 5.4% and 71% over the past 3 years—suggesting a solid earnings season. Third-quarter expectations are for revenues, earnings, and earnings-per-share (EPS) growth of 1.6%, -2.9%, and -0.8%, respectively. EPS is on pace for +1.1%, assuming a typical beat rate for the remainder of the season.

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