Investment Commentary – October 23, 2019

Year to Date Market Indices as of Market Close October 22, 2019
• Dow 26,788 (15.07%)
• S&P 2,995 (19.59%)
• NASDAQ 8,104 (22.14%)
• Gold $1,487 (16.65%)
• Oil $54.48 (18.51%)
• Barclay Bond Aggregate (8.32%)
• All World Index (15.83%)
• 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)

Dow shakes off disappointing results from Caterpillar, Boeing and heads higher

Stocks inched higher Wednesday morning despite a weaker-than-expected report from two Dow components and a poor update from a semiconductor company, with a fresh wave of corporate results on deck.

Wall Street is also watching developments pegged to Brexit, as a vote for a fast-track exit for Britain from the EU was rejected by parliament on Tuesday, but the delay eases concerns about the U.K. crashing out of the bloc without a deal on Oct. 31.

How are major indexes faring?

The Dow Jones Industrial Average DJIA, +0.21% rose 45 points, or 0.2%, at 26,832, while the S&P 500 index SPX, +0.13% was picked up less than a point at 2,997, a gain of less than 0.1%. The Nasdaq Composite Index COMP, +0.10%, meanwhile, slipped about 9 points. Or 0.1%, to reach 8,094.

On Tuesday, the Dow lost 39.54 points, or 0.2%, to 26,788.10, the S&P 500 index fell 10.73 points, or 0.4%, to 2,995.99, while the NASDAQ shed 58.69 points, or 0.7%, to 8,104.30.
What’s driving the market?

Results from Caterpillar Inc. CAT, -0.24% and Boeing Co. BA, +2.68% initially knocked the market lower in premarket action on Wednesday, with investors already unsettled from Brexit developments and weakness among chip companies. But stocks turned higher in early trading as investors took positives away from quarterly results from the blue-chip components.

That came amid a slide for the semiconductor sector following a poor forecast from Texas Instruments Inc. TXN, -5.79% that was much worse than expected in a late-Tuesday earnings report, with a new revenue estimate range that fell as much as a half-billion dollars below Wall Street’s consensus revenue estimate.

Overall, however, earnings from American companies have been better than feared, albeit off lowered expectations. Thus far, of the 98 companies that have reported third-quarter results in the S&P 500, 82.7% have delivered results above analyst expectations, while 12.2% reported below analyst expectations, according to research provider Refinitiv. By comparison, 65% tend to “beat” estimates, and 20% fall below consensus estimates, according to Refinitiv data going back to 1994.

Meanwhile, Parliament’s rejection of Prime Minister Boris Johnson’s legislative schedule for Brexit reduced the likelihood of a departure by Oct. 31 or a no-deal exit from the EU. The U.K. government has already asked for an extension to the end of January 2020, and European Council President Donald Tusk said on Twitter that he would recommend that request is granted.

JP Morgan Thought of the week

Last week, the IMF released its latest World Economic Outlook in which it downgraded 2019 global growth to 3.0%, the slowest pace since the Great Financial Crisis. It also revised down global growth for 2020 by 0.1% to 3.4% from its last update. The report cited a broad-based softening in manufacturing as the reason for a synchronized slowdown, driven by higher tariffs as well as uncertainty surrounding trade and geopolitics. Furthermore, idiosyncratic factors are causing stress in emerging market economies, while low productivity growth and aging demographics are challenging advanced economies. The IMF also noted that the subdued growth is happening even after major central banks have moved to ease monetary policy, estimating that growth would be 0.5% slower without the support of lower interest rates. Recently, some positive news has reduced some of this uncertainty, with the U.S. and China announcing discussions of the first phase of an agreement, and the EU and UK signaling a Brexit deal. However, the reality is that there is still plenty of work to be done before sounding the all clear. For this reason, global growth is likely to remain below its long-run average, which should push the Federal Reserve to cut interest rates at its October meeting.

Around the web

Market lull: The S&P 500 and the NASDAQ rose slightly for the second week in a row while the Dow slipped. The weekly moves were small–less than 1%–as Tuesday’s rise was largely offset by a decline on Friday. The S&P 500 remained more than 1% below its record high set in late July.

More Brexit confusion: With an October 31 deadline approaching, U.K. and European Union negotiators reached a new deal on Britain’s exit from the EU. Britain’s currency, the pound, surged to a five-month high, but then gave up some of those gains ahead of a weekend vote in which Britain’s Parliament forced Prime Minister Boris Johnson to seek yet another Brexit deadline extension.

Yield curve normalization: A bond market indicator that flashed warning signs about prospects for an economic recession has returned to a more normal level in recent weeks. In late August, the yield of the 10-year U.S. Treasury slipped below that of the 2-year note—rare instances of yield curve inversion. But the 10-year yield has since climbed 18 basis points above that of the 2-year yield.

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Thursday: Durable goods orders

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.

https://www.marketwatch.com/story/dow-futures-fall-100-points-as-caterpillar-results-disappoint-and-boeing-microsoft-on-deck-2019-10-23?mod=mw_latestnews
https://am.jpmorgan.com/blob-gim/1383452890099/83456/weekly_market_recap.pdf