Monday, November 4, 2019
Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
The economy looks good and the stock market is up
Just one month ago, the U.S. economy appeared to be teetering.
The manufacturing sector had showed activity hitting a 10-year low and businesses were signaling caution when it came to hiring and investing. Consumer confidence was waning. A decent September jobs report worked to sideline some of these fears and an expected third rate cut this year from the Fed bolstered investor enthusiasm.
But throughout the month of October, financial markets have increasingly bet that the bottom was in and that a full-on reversal of economic expectations was coming soon.
Now, it appears confirmation has arrived. At least according to the stock market.
The October jobs report published Friday topped expectations, as 128,000 new jobs were created last month despite the drag from the General Motors strike, which had lead economists to slash their forecasts ahead of this number. Positive revisions to September and August's jobs data — along with manufacturing survey data that was not as bad as feared — had strategists on Friday ready to squash bearish stories about the economy.
"We think [the October jobs report], along with other recent reports on consumption, on housing, and on retailing are emblematic of an economy in which the consumer remains strong, with strong levels of income, job opportunity, net worth, and further displays historically low levels of leverage," said Rick Rieder, BlackRock's Chief Investment Officer of Global Fixed Income.
"And while some of those positive factors may adjust somewhat lower from here; taken together, they are also in great contrast to those characteristics that previously preceded deep economic slowdowns."
Tom Lee at Fundstrat said Friday that the October jobs report and ISM data "support our view that the industrial cycle is bottoming."
"And the broader context is," Lee added, "it looks like the economic outlook in 2020 should be an improvement over 2019 — this is in contrast with consensus expectations/positioning that the US economy is about to tip into recession. Hence, we expect a risk-on rally into [year-end]."
On Friday, stocks closed at a record high.
Now, the market's bet on this cycle turning around didn't just start this week but has been catalyzed by earnings results coming in better than feared.
Jonathan Golub at Credit Suisse wrote in a note to clients on Friday that S&P 500 earnings have so far grown 0.2% against last year and are on pace to rise 1.1% for the quarter overall. This is modest growth, to be sure. But against expectations ahead of third quarter earnings season that corporate America could be facing an "earnings recession" for the first time in over three years, even a slim expansion in corporate profits has excited investors.
Deutsche Bank strategist Binky Chadha highlighted last week that positive stock reactions to positive earnings are exceeding historical averages while negative reactions are more muted. So far this earnings season, companies beating earnings estimates are seeing shares beat the market by 1.6% the next session, better than the 0.5% historical outperformance, according to Chadha. Meanwhile, companies missing expectations are being penalized less than in prior periods, falling just over 0.5% following a miss against the median historical decline of 1.6%.
Clearly, this market is giving companies the benefit of the doubt. On Friday, the S&P 500 logged its third record close of the week while the Nasdaq hit a record high for the first time since late July. The headline indexes are just reflecting the optimism we’re seeing in how investors are treating individual stocks.
The market’s enthusiasm for this economic cycle turning and the recession officially being canceled, however, is not universally shared.
Priya Misra, head of global rates strategy at TD Securities, told The Final Round on Friday that the October jobs report didn’t give investors a whole lot of new information, but reiterated that “we’re still [facing] this question of — is the global growth slowdown, is the manufacturing weakness, is this spilling over into the labor market?” Of course, to date, it has not.
But Misra adds that she’s “not so sure” we know for a fact this weakness won’t eventually hit the U.S. labor market and, in turn, dent consumption that is driving this expansion.
The stock market, on the other hand, appears right now to have made up its mind.
What to watch today
10 a.m. ET: Durable Goods Orders, September final (-1.1% expected, -1.1% prior); Durables excluding Transportation, September final (-0.3% prior); Factory Orders, September (-0.4% expected, -0.1% in August); Capital Goods Orders Nondefense excluding Air, September final (-0.5% prior); Capital Goods Shipments Nondefense excluding Air, September final (-0.7% prior)
6:55 a.m. ET: Under Armour (UAA) is expected to report earnings of 18 cents per share on $1.42 billion in revenue.
4:05 p.m. ET: Uber (UBER) is expected to report an earnings loss of 83 cents per share on $3.74 billion in revenue.
4:05 p.m. ET: Shake Shack (SHAK) is expected to report earnings of 20 cents per share on $155.09 million in revenue
Other notable report: Marriott International (MAR)
McDonald's CEO steps down after relationship with employee [Yahoo Finance]
McDonald's has a new CEO: 3 quick facts about him [Yahoo Finance]
Saudi Aramco IPO could create world's biggest listed company [Yahoo Finance UK]