Trade tensions continued to dominate the headlines; on Monday, the U.S. imposed an additional 10% tariff on $200 billion of Chinese goods. The tariffs will rise to 25% on January 1st in the absence of a trade agreement. Despite the announcement, the Dow Jones Industrial Average rose 2.25% while the S&P 500® Index gained 0.85% while the Nasdaq fell 0.29%, the Russell 2000® Index fell 0.55%. The Dow and S&P 500® both posted record highs on Thursday as the longest bull market on record continues.
Many commentaries this week noted the breadth of the market advance as a positive indicator for future growth. Also, under discussion are emerging trading patterns which hint at a rotation from the Technology sector, and defensive stocks, into cyclical stocks in the Financial, Industrial, Energy and Consumer Discretionary sectors. A large performance gap between growth-oriented and value-oriented stocks persists; analysts believe that investors are chasing growth stocks with “home run” potential but no earnings. For example, year-to-date, the subset of the Russell 1000® Growth Index stocks with no profits has gained 18%, 2% more than the Index. In August, these stocks gained 13.5% compared to 5.5% for the Index. Investors seem to expect that Technology’s recent market leadership will continue; analysts, though, warn that the sector’s pricing, and market expectations, may be overextended.
The announcement of additional trade tariffs generated only a muted market reaction; some companies commented about steps they may take to mitigate higher prices if the tariffs continue. Meanwhile, negotiations between the U.S. and Canada continued with no agreement on the horizon. On Friday, a White House Economic Advisor indicated that the U.S. and Mexico may move forward on a trade pact excluding Canada; however, the U.S. Congress is unlikely to approve a revision of NAFTA without Canada. OPEC will meet this weekend to discuss production increases in light of the U.S. ban on Iranian oil exports as of November 1st. Earlier in the week, the U.S. Energy Information Administration lowered expectations for U.S. shale production which, combined with the loss of Iranian oil, could drive prices higher.
The Federal Reserve is widely expected to raise the Fed Funds rate by 25 basis points when it meets next week; analysts will focus primarily on the post-meeting commentary. Entering the last week of the quarter, the markets will begin to shift attention to third quarter earnings. Investors will look for economic data, Fed commentary, earnings reports and corporate commentaries to gauge the potential strength of the fourth quarter.
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
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