Equity Markets Around the World Dropped… The U.S. markets dipped, led lower by the tech shares that had been leaders for most of the year. Asian markets fell further into correction territory.
What it means – At home, we’re dealing with higher interest rates, the possibility of election results that will be less market-friendly, trade tariffs that are cutting into exports, and the quiet period before earnings when companies put their stock buyback programs on hold.
These factors are hitting the markets just as we reached record highs. It makes sense that people are protecting some of their gains. At the same time, the Chinese are struggling with U.S. tariffs, which are crimping trade, and the Europeans are facing down weak economic growth.
The combination of factors is weighing on investors, who have turned decidedly risk-off during October. If earnings surprise to the upside or we get some movement in the trade tiff with China, things might turn around. Without such a positive catalyst, it could be a very bumpy road for the rest of this year and the start of 2019.
The Fed is creating uncertainty with higher short-term rates while it drains liquidity by reducing its bond portfolio. No one is certain what will happen because we’ve never seen anything on this scale before. Buckle up!
Prices Up 2.3% Over Last Year, Core Prices Up 2.2%… Inflation slowed a bit in September, with the headline number falling from 2.7% to 2.3% while the core reading, excluding food and energy, held steady at 2.2%.
What it means – Inflation readings over 2%, particularly at the core level, are part of the reason the Fed is raising rates and shedding bonds. If inflation remains elevated, we can expect the Fed to stay on course.
The Fed governors seem to be divided in how many rate hikes we’ll get before they take a pause, but the majority appear to favor at least three. That should stir up a lot of volatility in the markets.
Producer Price Index Up 2.6% Over Last Year, 2.5% Excluding Food and Energy… The headline number dropped from 2.8% last month, while the core reading increased from 2.3%.
What it means – Economists consider changes in producer prices to reflect inflation at the wholesale level. Eventually these prices work their way down to end consumers, pushing up inflation for everyday goods and services. With wholesale prices up more than 2%, we can expect inflation to remain elevated for months to come.
Earnings Season has begun… Starting with financial companies, American corporations will report third quarter earnings over the next three weeks.
What it means – With corporate tax reform, companies are posting earnings growth of 20% or more. The extra cash has given them the ability to invest in their businesses as well as buy back their stock. But in the two weeks leading up to their earnings reports, companies stop buying back shares so they don’t run afoul of securities laws. The drop in share repurchases could be exacerbating the recent downturn.
As for earnings, investors have enjoyed the run of big gains this year. The question is, what comes next? If companies fail to excite investors with their forward guidance, expect the markets to fall.
Pakistan Asks IMF for a Bailout… The Middle Eastern country threw in the towel on its debt and requested emergency lending from the international fund.
What it means – Watch this one closely. The Chinese made Pakistan their number one target for the One Belt, One Road Initiative, lending the country billions of dollars to build huge infrastructure projects. The Chinese loans have been shrouded in secrecy. The IMF demands a full accounting of all loans, while the U.S., the biggest benefactor of the IMF, refuses to allow any relief tied to Chinese loans.
If these loans keep Pakistan from receiving international financial help, it could stall the Belt and Road Initiative in other countries.
San Francisco Has a Homeless Problem… In a city where the average household earns more than $100,000 and is worth more than $1 million, there are thousands of homeless people who spend their nights on the streets.
Whether by choice, city policy, or some combination, most of the homeless end up in one small section of town. The concentration has led to such problems as human waste on the streets every day and more than 100,000 used needles recovered last year. The city had to replace 300 street lamp posts that had deteriorated because of human and dog urine. “Who’d a thunk it?”
Data supplied by Dent Research/Delray Beach Publishing
“When the facts change, I change my mind.
What do you do, sir?” ~ John Maynard Keynes
Our plan is “the plan will change.”
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