Aside from ongoing third-quarter earnings reports from corporate America, equity ETFs could see action this week on new home sales, durable goods orders, pending home sales, consumer sentiment and third-quarter GDP. Also, investors will get the Federal Reserve statement on Wednesday afternoon.
David Kelly, chief global strategist at JP Morgan Funds, says the biggest number of the week will be the initial read on third-quarter GDP. [ETF Weekly Review]
Below are Kelly’s thoughts on the report and other news investors should be paying attention to this week:
“Despite recent more positive economic reports on the housing sector, the third quarter started slowly for the economy overall and weakness in overseas markets will have hurt U.S. exports in the quarter. Nominal non-farm inventory growth appears to have been relatively strong but much of this increase was because of higher prices while the impact of the drought on agricultural inventories should also be negative. Overall, we are looking for 1.7% real GDP growth, a bit below the 1.9% consensus number and implying just 1.5% annualized growth over the past six months.
Given this weakness in domestic GDP, no growth in the Euro area, negative growth in Japan and slow growth in emerging markets, this was always going to be a tough quarter for S&P500 companies, particularly those with a global focus. In addition, a 6% year-over-year gain in the exchange rate of the U.S. dollar has the impact of reducing the dollar value of overseas sales and profits.
Because of this, with about a third of the earnings season behind us, a combination of results in the door and expectations for the remaining firms suggests a 6.0% year-over-year decline in total earnings and just a 0.3% rise in total revenues for the S&P500 companies. Both of these numbers look better on a ‘per-share’ basis, reflecting stock buybacks and both numbers should improve as the earnings season continues. This week, with 156 S&P500 companies due to report, should clarify the third-quarter earnings picture.
Finally, this week will see the third and final Presidential debate and a two-day Federal Reserve meeting. The Presidential debate is supposed to be on foreign policy although both candidates may also try to make domestic points. The race remains exceedingly tight so any stumbles or moments of brilliance could prove decisive in an election that clearly has important implications for both the economy and financial markets. Much less exciting will be the Federal Reserve’s two-day meeting as the Fed will not want to make any changes in policy so close to the election.
Many investors will remain in a wait-and-see mode – waiting to see what happens with the election, whether the economy can pick up some steam in the fourth quarter, whether European politicians will ever make any progress on restarting peripheral economies, whether Iran can be forced to abandon its nuclear ambitions without the use of force and whether China’s economy is indeed beginning to turn the corner.
However, while ‘waiting to see’ seems logical, it only makes sense if you are appropriately positioned in the first place. The next few months should see less uncertainty and, hopefully some of these issues resolved in a positive manner. If this occurs then ‘risk assets’ could benefit at the expense of cash and Treasuries and given relative pricing it still makes sense to be over-weight the former and underweight the latter.”