Deja vu

Key Points
  • Stocks continue to face pressure and volatility has resurfaced; as trade tensions have heated up yet again, and mixed economic data has fueled investor hesitation.

  • Although September’s jobs report posted a new low in the unemployment rate, some weaknesses are appearing in key leading indicators in the labor market.

  • Global equities have failed to make gains in the past 20 months, but positive earnings growth in the coming quarters may provide a boost for prices.

Listen to the latest audio Schwab Market Perspective.

“Exploring the unknown requires tolerating uncertainty.”
― Brian Greene

Confusion abounds

Volatility spiked at the beginning of October and U.S. stocks have continued to make limited headway. In fact, the S&P 500 is less than 2% above the initial peak on January 26, 2018. A meaningful breakout to the upside has been mired by the short-lived reprieve from trade worries; as investors remain hesitant due to conflicting reports from this week’s trade talks in Washington and recently-renewed tensions. Further, the manufacturing sector’s deterioration in September (along with some notable weakness on the services side), dysfunction in Washington, and ambiguity regarding monetary policy have kept stocks within a tight trading range. As was confirmed last month, the strength in large-cap, momentum, and low volatility strategies has been sustained; along with defensive stocks’ continued sprint ahead of their cyclical peers. This has coincided with key defensive sectors’ positive earnings growth expectations for the third quarter. Yet, S&P 500 earnings are expected to decline by more than 3% year-over-year as per October 10, 2019 Refinitiv data. Although only a small fraction of S&P 500 companies have reported, so far the vast majority have beaten expectations thus far; but we are keeping a close eye on mentions of headwinds due to trade.

When bad news becomes good news

U.S. stocks slipped at the beginning of October on the heels of the ISM Manufacturing Index’s deeper fall to 47.8, and the Non-Manufacturing Index’s drop to 52.6—the former again below 50, marking contraction; and the latter above, marking expansion. Breadth among both surveys’ components was weak, and notably, Non-Manufacturing’s employment component fell to 50.4—the lowest since February 2014. You can see from the charts below that employment has suffered markedly in both sectors; and if manufacturing continues its downtrend, it could pull services into contractionary territory.