What could calm the markets? Solid profits, economic reports.
What could calm the markets? Solid profits, economic reports.
After a harrowing week for the financial markets, investors will look for solid corporate earnings reports and healthy economic news in the coming weeks to calm things down.
This week, bond yields increased significantly, fears of faster rate increases and the possibility of a long trade war between the United States and the United States. China requested a two-day route in the stock Exchange. The Dow Jones Industrial Average fell 1,300 points on Wednesday and Thursday.
Even when the Dow recovered nearly 300 of those points on Friday, some experts said investors' concerns had not been resolved. But if new evidence emerges that the economy remains healthy and growing, and companies continue to produce solid earnings gains, the stock market could eventually put those fears aside.
"The basic question that everyone has to ask is: has the fundamental situation deteriorated or not?" said David Kelly, chief global strategist at JPMorgan Funds. "Unless something goes wrong, the volatility will finally subside and the stock will go up."
The third quarter earnings season will intensify in the coming weeks and should show if earnings growth remains strong despite market concerns. It is projected that earnings will increase almost 20 percent from the previous year, a healthy gain if it is slightly below the two previous quarters.
That could be a difficult obstacle to clarify: 74 companies in the Standard & Poor's 500 index have already said that their earnings will be below analysts' estimates. That's more companies that normally issue such warnings.
"Keep in mind that analysts have set the bar very high for profit season (third quarter)," wrote David Rosenberg, chief economist at Gluskin Sheff, in a note to clients.
As important as the numbers, investors will focus on what company executives say about the impact of the US-China trade struggle, the higher interest rates and other challenges facing the economy. Talking about threats to future earnings growth could hurt investors and offset any positive vibes from good numbers in the last quarter.
The commercial issue "is going to be a big focus," said David Joy, chief market strategist at Ameriprise.
That's because it's not yet clear what the long-term impact of the rates will be. Will American multinationals, such as Caterpillar, Apple and GM, begin to change part of their production in China? Will the prices of more products begin to rise to offset the cost of tariffs?
"Breaking global supply chains is inflationary," Rosenberg said.
These concerns increase because economists increasingly expect the Trump administration's struggle with China to continue for the foreseeable future. Many investors and business executives have previously assumed that the administration's fees were intended to obtain short-term concessions.
But unlike other Trump struggles with countries like Canada, which focus on specific tariffs and specific products, the administration's complaints with China focus on more general issues such as intellectual property rights and industrial policy of that country.
"We hope this is quite long," Joy said. "These are really big and strategic geopolitical problems that are not easily resolved."
President Trump and Chinese President Xi Jingping are now scheduled to meet at an international financial summit at the end of November. If the two leaders can agree at that meeting to suspend additional import taxes while fixing their differences, that could boost the markets, Joy said.
Some economic reports next week may also mitigate the concerns of investors, or feed them. A report on retail sales and restaurant sales will show if consumers continue to spend healthily. Expectations are high: analysts predict that sales rose 0.6 percent in September, after they barely expanded the previous month.
And on Friday, the National Association of Real Estate Agents will report on existing home sales last month. Sales have fallen by 1.5 percent in the last year, as sharp price increases have exceeded wage gains, leaving many potential home buyers unable to afford a purchase.
And now mortgage rates have risen to their highest level in seven years, making homes less affordable. The average rate for a 30-year fixed mortgage rose to 4.9 percent this week, from 3.9 percent a year ago.
Retail and housing sales data could be affected by the impact of Hurricane Florence, which tore apart the Carolinas in September. Hurricane Michael will not appear in the data until next month.
Even so, economists predict that home sales in September will decrease again.
The slowdown in home sales has already worried some economists, who see it as a sign that economic expansion may not last much longer.
"I think of housing as the canary in the coal mine," said Diane Swonk, chief economist at Grant Thornton.
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Jay reported from New York.
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