Market Strategy Radar Screen Weekly October 31, 2016

  Got to pay your dues if you wanna sing the blues

Even as the market had grown confident about the election result, trouble appeared on the horizon…

Consumer spending, which represents the largest percentage of the US economy (around 69%) came in under expectations rising about 2.1% in the period, or about half as much as it had grown in the prior quarter. The decline in corporate investment in equipment (the fourth in four quarters) marks the longest period of decline since the economic expansion began.

The combination of softer consumer spending, the decline in corporate investment combined with a recently resurgent dollar (on the back of Brexit and expectations that the greenback will gain in popularity among foreigners as the Fed works to normalize interest rates) fed into skepticism about the improvement in the GDP number pushing not a few pundits, observers and investors to project that Q3’s attractive 2.9% growth rate would unlikely be sustained.

However, from our perspective, we think best to wait for the next reading on Q3 growth which will include the results of the earnings season for the period which is still in progress. With some 58% of S&P 500 companies having reported thus far through the end of last week, earnings and revenues have been broadly better than expected at the beginning of the earnings season (see page 4 of this report for our current earnings scorecard).

For now, we’ll accept that risks to growth persist via the aforementioned challenges as well as others but remain prone to not looking a gift horse in the mouth. We’ll readily accept good economic news for what it is.

Progress not perfection has been a hallmark of the economic and market recovery that brought us to the current economic expansion which based on current data looks sustainable if “just too moderate” for the less impatient.

Last Friday stocks moved lower adding to weakness that had moved stocks lower from last Tuesday.

News last Friday posing new risk to what had been taken by many as the market’s expectation of a Democratic victory in the Presidential election on November 8th raised concerns among traders that fed stock price weakness as news that the FBI was reopening its Clinton email probe crossed the tape on Friday afternoon.

While the news (which seemed to spread in a digital global moment) may wind up having less or even perhaps more impact on the election outcome than the markets and observers were intimating on Friday, the VIX reflected an increase in uncertainty that impacted stock prices for the day.

The slip in stock prices which began on Tuesday took stocks down 1.2% from last Monday’s close through the close on Friday.

Investors will start the week focused on the Presidential election as Election Day a week from Tuesday bears down on the landscape.

That notwithstanding, a busy earnings season calendar this week leading up to the nonfarm payroll number on Friday should keep market denizens as busy as a one eyed cat in a fish market.

Breaking news:

On Sunday as we went to press Canada’s Prime Minister Justin Trudeau signed a free-trade pact with the European Union as earlier objections from a small region in Belgium that had threatened the agreement were resolved. The agreement which has been in negotiation since 2009 will reportedly reduce tariffs for EU manufacturers by just under $550 million and boost trade between the two markets.

The pact is expected to increase the EU’s economic output by about 12 billion euros a year and expand EU-Canada trade by upwards of 25%.

The agreement will end 98% of tariffs on goods traded from the start and 99% of tariffs by the seventh year. Each side will dismantle all industrial tariffs and more than 90% of agricultural duties.

The agreement comes at a time when globalization has come in question and is under pressure on the back of rising populism, trending nationalism and concerns about economic inequality around the world.

The signing of the agreement on Sunday provides hope that globalization will be able to weather and surpass the current headwinds it currently faces.

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