U.S. Market Outlook With Rising U.S. Dollar, Higher Short-Term Interest Rates

By Nottingham Advisors

While there were numerous theories behind the October sell-off in equities, weak economic data was not a culprit. Although perhaps softening a tad from earlier reports, by and large US economic data remains solid as evidenced by the third quarter’s 3.5% GDP growth rate.

Cyclical indicators such as the Markit US Manufacturing PMI and the ISM Manufacturing PMI (with readings of 55.6 and 59.8 respectively) both pointed to a steadily expanding US manufacturing base in September while the Markit US Composite PMI and the ISM Nonmanufacturing (54.8 and 61.6) were also strong (readings above 50 suggest expansion and below 50 contraction).

Despite the burgeoning trade war, rising US Dollar and higher short-term interest rates, corporate earnings remain solid with expectations for +25% YoY growth in bottom line EPS. Third quarter top-line revenues are expected to grow roughly +7.5% from the same period a year ago as the energy sector continues to recover.

With approximately half of S&P 500 companies having reported Q3 numbers, 75% have beaten earnings estimates while 56% have topped revenue forecasts.

A strong labor market continues to boost the US economy, elevating consumer confidence and spending. September’s 3.7% unemployment rate was the lowest reading in nearly 50 years. Third quarter Nonfarm Productivity came in at 2.2%, slightly beating estimates while Q3 Unit Labor Costs rose +1.2% versus estimates for a +1.0% gain. Average hourly earnings rose +2.8% YoY in September while Weekly Initial Jobless Claims (chart below) approached 200,000, a level not seen in years.