Trick or Treat

The Almond Joy 

The first read on third quarter GDP showed the economy grew at an annual pace of 1.9%. While its lower than what we saw last quarter, things could have definitely been much worse. Consumers continued to do their part to keep this record long economic expansion going as consumption, which accounts for 70% of the economy, increased 2.9%. Businesses, on the other hand, slowed as spending on equipment fell 3.8% and investment in structures fell more than 15%, which is the steepest decline in almost four years.

Moral of the story: While businesses have become increasingly cautious, consumers seem to have to have acclimated to the economic uncertainties presented by a long list of global geopolitical uncertainties. How long consumer spending can make up for the lack of business spending is the question. The October consumer confidence index remained relatively flat compared to September, however, while consumers feel fine about the economy today, their concerns about the future continue to rise driven by the recent slowdown in hiring. Let’s hope this doesn’t impact holiday shopping. 

The Twix 

As expected, the Fed cut rates by another 0.25% at their meeting this week, which is the third rate cut in a row, and exactly what the market was seeking. While the Fed has taken measures the last three months to sustain the economic expansion in the midst of the negative impacts of global uncertainty, Chairman Powell effectively signaled that further policy changes were unlikely without the presence of persistent economic indicators one way or another. 

Moral of the story: The Fed’s dual mandate hinges around maintaining full employment and 2% inflation. We got indicators of both this week. Core inflation came in at 1.7% in September, which is close enough to the Fed’s target. Unemployment came in at 3.6% in October, still near historic low levels. Unless we see inflation or employment change in a big way, it seems like the Fed is done. However, manufacturing continues to be in contractionary territory in October and if business sentiment continues to deteriorate, it will sure impact unemployment sooner or later. 

Literally the entire candy store 

As if a Fed meeting, GDP report, and jobs numbers weren’t enough to digest, over 1,100 companies reported earnings this week. A noticeable trend has been the marked slowdown for manufacturing related companies (Caterpillar, Boeing) as demand has been lower than expected. On the other hand, consumer companies (Apple, Starbucks, Dunkin, Mattel, Mondelez, Electronic Arts) seem to be benefitting from the consumer’s continued strength.

Moral of the story: About 70% of the S&P 500 companies have reported earnings so far and about 75% of them have been better than expected. Caterpillar is generally considered an economic bellwether and not only did they miss expectations this quarter (driven by the increased costs including tariffs and lower demand in China), the company also reduced full-year outlook, indicating they don’t expect the situation to improve meaningfully.