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Weekly Market Commentary October 22, 2018

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U.S. stocks increased last week by the thinnest of margins. The S&P 500 rose, but the result rounded to 0%. The MSCI ACWI slid a mere 0.1%. The bond market continued to slump as the Bloomberg BarCap Aggregate Bond Index dropped 0.4%.

Key Points for the Week

  • The S&P 500 was positive last week but by a miniscule amount.
  • Corporate earnings are supporting the market.
  • Chinese economic growth slowed last quarter and missed expectations.  

A steady diet of positive earnings announcements helped to slow the market decline. When markets decline at the beginning of the quarter, earnings results can provide frequent reminders of the underlying strength in corporate performance. While we remain concerned about valuations, inflation, trade, and investor complacency, it is important to remember the positive factors affecting the market. Economic growth remains strong, and corporations continue to produce solid results.

Chinese Economics

One of our top risks is China’s growing debt burden. China’s third quarter GDP report showed the country’s year-over-year GDP growth slowed to 6.5%, the lowest rate since the 2008 financial crisis. While slow for China, 6.5% is still incredible. The U.S. is expected to grow around 3.3% in the third quarter. For the U.S., 3.3% is rapid growth.

Still, the growth number missed expectations of 6.6%. This can be attributed to declining growth in industrial output over the last quarter. Export data were very strong and led investors to conclude the U.S.–China trade dispute is having little impact. Our view is the opposite. Concerns over future tariffs caused some transactions to be moved forward, pushing exports higher. Businesses also seem to be scaling back expansion plans because of uncertainty regarding trade, which lowers current growth.

Many Chinese officials restored some market confidence by claiming the recent market performance doesn’t reflect the overall economic health of China. The government is clearly concerned with how the market is performing. Look for fiscal policy to play a key role in counteracting the recent downward trend in China’s market.

Fun Story

Oblivious man had $1M lottery ticket for four months

A man in Connecticut cleaning out his wallet recently realized he owned a Powerball ticket worth $1 million. Apparently, he bought it on a whim after stopping for ice cream and then forgot about it. Some prudent investors may know the feeling. Being fully invested during the 10-year bull market could be equivalent to discovering a $1 million Powerball in your pocket. Except if you checked it later, it may be worth $10 million.

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