Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Lower Forecasts Trump Earning “Beats”

Third quarter earnings announcements overruled market action this week. Firms for the most part have been “beating” estimates, but haven’t been able to speak of future growth as positively as they have the past year. Without getting into detail, the jitters that infected stocks this week can be traced to Tuesday when both Caterpillar and 3M reported earnings that revealed not only slower growth, organically speaking, but also lower forward guidance. Of course, tariffs were cited as a headwind to profit growth, but, again, growth was slowing long before tariffs were implemented. It’s therefore reasonable to assume that what we’re seeing is the impact of something else, i.e., higher interest rates (in addition to reduced storm spending), as it spreads across most sectors. This analysis might exclude the social media firms, whose growth paradigm is still rather young – Twitter, and perhaps Facebook (which reports next week). In any case, as earnings concerns mounted, the major indices lost ground, albeit reluctantly, as the Dow, NASDAQ, and S&P fell 2.7%, 3.1%, and 3.73%, respectively.

As stocks fell, fixed income markets benefitted from the typical “flight to safety” rotation, but a note of caution might be worth mentioning as a future warning to bond investors. The rotation gains were feeble, as the rally in the 30-year T bond was about half the historical norm. Overseas, the attitude toward high-grade (northern realm) European debt was noticeably better after economic reports there showed evidence of higher inflation anda weaker economy. Those reports also spurred a selloff in the euro and some short covering in the US dollar, which propelled the greenback to near interim highs for the year. Again, I find this rather ironic because economic conditions are just as bad, if not worse, here in the States (September new home sales came in at -5.5%). However, relatively tighter (than the ECB) money talk from Fed governors this week may have tipped the balance in favor of the greenback for now. Aside from this, oil slipped further, despite the usual spin on inventories, in reaction to slower US growth prospects. And the metals held above technical support levels in defiance ofdollar strength. Gold added 0.51% to silver’s 0.78%.

Next week we’ll get a look at the ADP and US non-farm payroll employment reports, along with the bulk of earnings reports and a policy decision from the Bank of Japan. All of that might prove inconsequential in comparison to the next Fed/FOMC meeting scheduled for November 8th. At that time we’ll take another step towards understanding the Fed’s position – by which I mean just how helpless the Fed may be in adjusting interest rates to more economically/financially productive levels.

Best Regards,

David Burgess
VP Investment Management