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          1. Weekly Market Update (October 14 – October 18, 2019)

            By Nela Richardson October 18, 2019

            U.S. stocks ended modestly higher as better-than-expected earnings and optimism around Brexit were offset by ongoing global growth concerns. The third-quarter U.S. earnings season kicked off last week, with major banks reporting solid earnings against depressed investor expectations, leading the group higher. Also helping investor sentiment was the news that the EU and U.K. agreed on a Brexit deal after days of negotiations. However, uncertainty remains as the deal will need to be approved by Parliament over the weekend. On the negative side of the ledger, U.S. retail sales disappointed, and the International Monetary Fund (IMF) once again lowered its projections for global growth this year from 3.5% to 3%. We continue to believe that consumer spending remains well supported and that global growth will stabilize, but we also expect volatility to increase in line with historical averages.

            Earnings Seasons Kicks off Amidst Multiple Geopolitical Headlines

            This is the time of the year in which multiple sports seasons vie for the attention of avid fans. The countdown to the World Series is under way. Meanwhile, hockey and basketball are just starting, and football is plowing through the middle of its season. With several popular sports either ending, kicking off or picking up steam, it is hard for fans to always know what to watch and what games will matter most.

            That’s also how it felt for investors tracking headlines last week. It was the kickoff to the third-quarter earnings season, the market received new economic data showing slipping growth, and geopolitical events like Brexit finally started to take shape.? So where does an investor spend his time? How does he or she sort through a barrage of headlines that all seem important and impactful?? Several economic and political events are up in the air in these latter stages of a bull market, and the U.S. is on the cusp of a 2020 presidential-election season. Despite these distractions, here’s how investors can keep an eye on the ball.

            1. Know the Key Stats: Fundamentals Are Slowing but Still Growing

            Healthy household spending has been the linchpin of economic growth over the 10-year expansion, contributing 70% of GDP. Last week new data showed that a key indicator of consumer health, retail sales, slumped for the first time in seven months, dropping 0.3% in September. Offsetting the decline was revised August sales growth, up to 0.6% from a still robust 0.4%. Though the monthly slowdown is partially explained by an early Labor Day that pulled holiday sales into August instead of September, it prompted market concerns that consumers' resilience to tariffs and slowing growth was starting to falter. If a new round of tariffs announced by the White House goes into effect later this year, we recognize that consumers may be more negatively affected by trade concerns or the prospect of rising prices on consumer goods.? However, despite trade headwinds, we think a strong labor market, high savings rates, and below-average debt burdens put consumers in a good position to keep spending in step with the average pace of the expansion.?

            Moreover, we expect low interest rates to help buffer corporate profits and consumer spending from challenges tied to weakening business confidence and manufacturing conditions.? With no recession imminent, in our view, the economy is on track to support the continuation of steady stock returns, albeit at a slower pace.

            1. Follow the Corporate Scoreboard: Hovering Near Record Highs, Stocks Do Not Appear Overpriced.

            Stock prices are now less than 1% shy of the record highs the S&P 500 reached earlier this year.? We still think that in the latter stages of the bull market stock returns have further to climb. But it’s important for long-term investors to pay attention to more than just the stock price1. Knowing the status of what drives stock returns – namely earnings, dividends and valuations – is also important.

            Toward that end, last week kicked off the start of the third-quarter earnings season, with tech giant Netflix, pharmaceutical stalwart Johnson & Johnson, and big banks like JP Morgan Chase, Bank of America and Morgan Stanley also beating analyst expectations. Estimates are for earnings to accelerate in coming months, with year-over-year growth in trailing 12-month profits improving from the three-year low of 2.5% in the third quarter to 6% in the fourth quarter. We expect further gains in 20201.

            Though slowing from the double-digit pace of the last two years, corporate performance appears strong enough to support the bull market, and we expect equities to outperform bonds. We also think that stocks are reasonably priced given 1) current valuations and dividend yields that are in line with historical averages, 2) support from central bank stimulus, and 3) our expectation for modest economic growth ahead.

            1. Look for the Game Changers: Trade Deals Could Eventually Be Catalysts for Slumping Global Growth.

            Last week a world finance organization, the International Monetary Fund (IMF), lowered its projections for global growth this year from 3.5% to 3%, the lowest level in 10 years. The growth forecast was pulled down by trade barriers, country-specific factors, and structural trends like aging demographics and slowing productivity growth. Despite the downbeat forecast, there was some good news, as the IMF expects growth to creep up to 3.4% in 2020 and does not foresee an imminent recession.?

            We also expect global growth to stabilize and rebound despite macroeconomic challenges from trade and weak manufacturing around the world. Last week also showed that for major trade deals there may be progress on the horizon.? European leaders announced a tentative Brexit trade deal between the U.K. and the eurozone.? This deal, led by new U.K. Prime Mister Boris Johnson, still needs to be approved by Parliament, and it has terms like the deals that were voted down by lawmakers under former Prime Minster Teresa May.? Despite these political challenges, last week’s developments, if they continue, mean that Europe can avoid the disruption of a no-deal Brexit, which will likely add stability to the region.

            Recently, the White House also announced a tentative trade deal between the U.S. and China, but we regard this deal as being in its early stages. With worldwide trade at its lowest level since 2012, with a de-escalation of trade tensions, and with continued positive negotiations, this environment bodes well for stabilizing and improving global growth ahead, in our view.

            1. Be Aware of Fast Breaks: Headlines May Prompt Short-lived Volatility

            Last week also saw several geopolitical headlines, including the U.S. withdrawal in Syria, the ongoing impeachment inquiry, and the 2020 Democratic presidential debate. Though we may see more market moving headlines tied to geopolitical events, we expect periodic bouts of volatility to remain at normal levels. Since 1990, there have been three dips in the market (a decrease in S&P 500 returns of 5% or more) and one correction (a drop of 10% or more) on average each year as shown in the table below. In 2019, there have been two dips so far and no corrections.

            Year

            Number of Dips
            (5% or more)

            Number of Corrections (10% or more)

            2015

            3

            2

            2016

            1

            0

            2017

            0

            0

            2018

            4

            2

            2019 YTD

            2

            0

            Annual Average
            (1990- present)

            3

            1

            Source: Ned Davis Research, S&P 500 as of 10/17/2019
            1. ?Root for the Home Team: Stay Focused on Long-term Financial Goals

            Part of the fun of sports is cheering for the teams you know best. Whether it’s your college football team or the baseball team in your hometown, it’s the personal connection with the team that keeps you invested in their success over multiple seasons. ?You can become a fan of your own portfolio by having a long-term perspective and a diversified playbook of high-quality investments that can help you achieve positive returns over time.? Working with a financial advisor can help you construct a portfolio that has the right mix of bonds and equities to help keep you moving toward your long-term financial goals season after season.

            Sources: 1. FactSet

            Nela Richardson, PhD, Investment Strategist

            Index Close Week YTD
            Dow Jones Industrial Average 26,770 -0.2% 14.8%
            S&P 500 Index 2,986 0.5% 19.1%
            NASDAQ 8,090

            0.4%

            21.9%

            MSCI EAFE 1,920.09 1.2% 11.6%
            10-yr Treasury Yield 1.75% 0.02% -0.93%
            Oil ($/bbl) $53.69 -1.8% 18.2%

            Bonds

            $112.8 0.1% 8.2%

            Source: Bloomberg, 10/18/19.? Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

            The Week Ahead
            The third-quarter earnings season heats up with 20% of S&P 500 companies reporting throughout the week. Important economic data being released include existing home sales on Wednesday, new home sales Thursday, and consumer sentiment Friday.

            Review last week's weekly market update.

            Important Information

            The Weekly Market Update is published every Friday, after U.S. markets close.

            The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.

            All content of the Dow Jones Indexes ? 2017 is proprietary to Dow Jones & Company, Inc.

            The Dow Jones, S&P 500 and Barclays Aggregate Bond Indexes are unmanaged and are not meant to depict an actual investment.

            Past performance does not guarantee future results.

            Diversification does not guarantee a profit or protect against loss.

            Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

            Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

            This information is approved for use with the public.

            It is intended for informational purposes only.

            It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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