Stocks Slump Despite Strong Growth

Stocks Slump Despite Strong Growth

Insights from Legg Mason's investment managers on current stock volatility; another strong quarter for U.S growth; Brazil's election signals changes ahead

“I never felt I did anything because of pressure from other people”
Former Fed Chair Janet Yellen

For insights into the equity selloff, read U.S. Markets Out of Rocket Fuel?October Volatility and Market Rotation and October Volatility is Not Atypical.
 

U.S. Growth: Still Muscular The U.S. economy grew at a better-than-expected 3.5% annualized rate in 3Q, supported by strong consumer spending, inventory-building by businesses, and strong government spending. That made for the strongest 2-quarter growth rate since Q2 and Q3 of 2014.

Consumer spending, which makes up about 70% of the economy, surprised by accelerating a full 4%, more than making up for the relatively soft 0.8% gain in non-residential business development.

One key figure: the relatively small 1.6% growth rate of the core personal consumption price index.  This figure could weigh heavily on the current lively debate about the Fed’s plans for rate hikes: if prices aren’t rising as quickly as expected, that adds weight to the “dovish” argument that the FOMC should be less rather more aggressive about rate hikes.

Financial markets appeared unimpressed; as of 10:00 AM ET, U.S. equity indexes were trading downward, with the Dow Jones Industrials falling some 375 points to 24,600 (-1.5%), the NASDAQ down over 2.75% to 7110.65. The U.S. Treasury yield curve steepened yet again, with 10-year Treasuries falling about (-4) basis points (bps) to 3.08% while the 30-year fell a smaller (-2.6) bps to about 3.32%.
 

Brazil: Runoff election Polls suggest that the result of Sunday’s runoff election will be a victory for controversial political outsider Jair Bolsonaro, poised to benefit from widespread political and economic discontent stemming from corruption scandals and weak growth.

The country’s currency has strengthened since Mr. Bolsonaro’s victory in the first round on October 7; the Brazilian real is up some 5% since the election, to 3.68 to the U.S. dollar. Yields of Brazil’s 5-year government bonds have fallen from 10.53% to as low as 9.3% -- a rare result amid this year’s emerging  market rout.  While part of the credit may go to the country’s jump in soybean exports as a result of the U.S.–China trade spat, hope for an end to the country’s misery may be more pertinent.

 


All data source: Bloomberg,  October 26, 2018, 10:00 AM ET, unless otherwise indicated.

Definitions: 

The Dow Jones Industrial Average (DJIA) is an unmanaged index composed of 30 blue-chip stocks, each with annual sales exceeding $7 billion. The DJIA is price-weighted, reflects large-cap companies representative of U.S. industry, and historically has moved in tandem with other major market indexes such as the S&P 500.

The NASDAQ Composite Index is a market-capitalization-weighted index that is designed to represent the performance of NASDAQ securities and includes over 3,000 stocks.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

 

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