Gradient Investments Weekly Talking Points 10/7/19

All data is for the week ended October 4, 2019.

Stocks

US markets were mixed last week with the S&P edging down 0.30%, the Russell 2000 down 1.28% and the NASDAQ up 0.57%. The week entailed three days of drops offset by hefty market gains on Friday as employment was stronger than anticipated (see Economic Data below), providing a more positive backdrop. Best performing US sectors were technology and health care. The poorest performers were energy and materials.

We are heading into third quarter earnings season with a consensus projection of a 4.1% earnings decline versus an extremely strong earnings report a year ago.² Per usual, we believe actual earnings will exceed expectations by approximately 3 points. The following quarter has easier comparisons and are likely to rise; thus, we do not anticipate two consecutive quarters of earnings decline which would be an earnings recession.

Fixed Income

Interest rates fell and bond values rose last week, with the benchmark 10-year US Treasuries ending the week at a 1.52% yield, down 17 basis points following a disappointing report on manufacturing (see Economic Data below).¹ We will be listening as the Federal Reserve chair speaks on Tuesday, but at this point expectations are high that the Fed will lower interest rates at their late October meeting.

Commodities

Crop production is well below averages for this time of year. The corn harvest is just 11% complete, which is 8% below average.  Just 43% of the crop is considered mature versus an average of 73%. Soybean harvest is at 7% compared to a 20% average for this time of year. In anticipation of the US/China tariff meeting next week, it’s estimated that the Chinese have bought 2 million metric tons of soybeans.³ Ending stocks of corn and soybeans are estimated to fall, resulting in higher prices.⁴

Economic Data

The unemployment rate fell to a 50-year low according to the latest jobs numbers released on Friday. Although the September numbers were shy of expectations, the prior two months were adjusted significantly higher. Wages are up 2.9% on a year over year basis.⁵

The ISM Manufacturing PMI disappointed consensus, falling to a cycle low of 47.8 in September from 49.1 in August. Earlier, the Markit PMI (double the sample size with different surveys) improved to 51.1 in September— the best since April. In the ISM survey, a burst in construction spending for single-family homes offset declines in non-residential construction while government construction rose for the second consecutive month.⁶

Company News

Apple Inc. (AAPL), a G50 and Core Select holding, and Skyworks Solutions (SWKS), a G50 holding, rose on Friday following a report that production of Apple’s new iPhone 11 is running about 10% higher than previously expected, driving demand for components.⁷ Apple and Skyworks stocks rose 3.7% and 4.1%, respectively, for the week.

Johnson & Johnson (JNJ), a G50 and Core Select holding, surprised investors with a settlement involving two Ohio counties ahead of an upcoming opioid trial, which should increase clarity on the company’s potential for liability on future lawsuits.⁸ In doing so, investors’ attention should shift back to fundamentals. Shares rose 3.9% for the week.

Did someone say Octoberfest?

The oldest known brewery still in operation today is the Benedictine Weihenstephan Breezeway in Bavaria, Germany.  It is estimated to have opened around 768 A.D. It was officially licensed by 1040 by the City of Freising for beer making.

Sources:

¹ JP Morgan Weekly Market Recap 10-7-19

² Factset Earnings Insight 10-4-19

³ USDA Quarterly Grain Stocks 9-30-19

⁴ AgWeb “Reuters October WASDE Estimates: Bullish Corn & Soy” 10-7-19

⁵ Bureau of Labor Statistics 10-4-19

⁶ Institute for Supply Management press release 10-1-19

⁷ Nikkei Asian Review “Apple Increases Prodiction of iPhone 11: Sources” 10-4-19

⁸ Johnson & Johnson press release 10-1-19