Investment Commentary – October 16, 2019

Year to Date Market Indices as of Market Close October 16, 2019
• Dow 27,024 (15.85%)
• S&P 2,995 (19.50%)
• NASDAQ 8,148 (22.81%)
• Gold $1,490 (17.87%)
• Oil $53.07 (15.99%)
• Barclay Bond Aggregate (8.23%)
• All World Index (15.27%)
• Fed Funds Rate 2.00 (-0.25 rate cut 9/18/19)
• US Real GDP Growth 2.0 Q2/2019 (Down from 3.1 in Q1)

The Dow Gained 237 Points Because Strong Earnings Trump Nearly Everything

The three main U.S. stock indexes finished with substantial gains on Tuesday as third-quarter earnings reports began to roll in. Positive results from blue-chip companies such as JPMorgan, Johnson & Johnson, and UnitedHealth drove stocks higher.

Stocks jumped higher on Tuesday, as investors embrace third-quarter earnings season with optimism. The Dow Jones Industrial Average has gained 237.44 points, or 0.89%, to close at 27,024.80. The S&P 500 is up 29.53 points, or 1.00%, to finish at 2995.68, and the Nasdaq Composite rose 100.06 points, or 1.24%, to close at 8148.71.

Companies kicked off the reporting season on a positive note; all the S&P 500 companies that reported today—except for Goldman Sachs Group (GS) and Wells Fargo (WFC)—beat third-quarter consensus expectations for earnings per share.

But even the two major banks that missed views saw their stocks close with gains. The financial sector has been out of favor for most of the year, and banks have some of the lowest valuations in the stock market. Investors might be finally gravitated to the cheaply traded sector and bet on its rebound. For Wells Fargo, investors are looking forward to a turnaround under Charles Scharf, who will take the CEO post on Oct. 21.

Other nonbank reporters including asset manager BlackRock (BLK), J&J, and UnitedHealth saw their stock end Tuesday with gains of 2.4%, 1.6%, and 8.2%, respectively.

Still, amid a slowing global economy and trade-related uncertainties, Wall Street expects overall earnings of S&P 500 companies to come lower than last year for a third straight quarter, according to FactSet data. This could mark the first nine months of declining earnings since the period from the fourth quarter of 2015 through the second quarter of 2016. According to FactSet, analysts are looking for S&P 500 earnings to decline 4.6% in the third quarter as compared with the same period last year.

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Trade progress: About 10 minutes before U.S. markets closed on Friday, U.S. and Chinese negotiators announced a partial trade deal between the world’s two largest economies. The tentative agreement includes a U.S. retreat from a threatened tariff increase, a Chinese commitment to buy U.S. farm products, and language addressing differences over intellectual property and financial services.

Fed backstop: The U.S. Federal Reserve announced plans to buy Treasury debt to increase the size of its balance sheet and prevent a recurrence of recent stresses in the repo market, which provides short-term funding for corporate borrowers; the Fed planned to begin initial purchases of $60 billion in Treasury bills starting Tuesday.

Weak inflation: The latest reading on U.S. inflation showed that the Consumer Price Index was unchanged in September relative to the prior month, the weakest inflation reading in eight months. The latest data could alleviate concerns that further interest-rate cuts by the U.S. Federal Reserve could unleash a spike in inflation.

Upcoming Events:

Wednesday: Retail sales, U.S. Census Bureau
Thursday: Housing starts, U.S. Census Bureau, Housing Market Index, and National Association of Home Builders

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.