Weekly Update—Midterm Rally Buoys Weekly Gains, China Woes Continue

US: S&P 500 Index +2.1%, Dow +2.8%, Nasdaq +0.7%
Europe: STOXX Europe 600 +0.5%, German DAX +0.1% France CAC 40 +0.1%, U.K. FTSE 100 +0.7%
Asia: Japan Nikkei +0.0%, China Shanghai Composite -2.9%, Korea KOSPI  -0.5%
Rates/Commodities: 10-Year Treasury yield -3 basis points to 3.19%, WTI crude oil -3.9%, COMEX gold -0.7%

Major U.S. indexes added to last week’s gains amid an eventful week that included midterm elections, a Federal Reserve (Fed) monetary policy meeting, another string of corporate earnings, and some key economic data releases. Markets ticked higher ahead of the U.S. midterm elections before rallying more than 2% Wednesday after an as-expected outcome, by-and-large. The Federal Reserve left monetary policy unchanged when its two-day meeting concluded Thursday. However, it did acknowledge that business investment has slowed recently. Aside from that comment, the policy statement was mostly unchanged from the prior meeting, which left investors with the impression that a rate hike in December remains highly likely. Underpinning U.S. stocks throughout the week were third-quarter earnings reports from 75 additional S&P 500 component companies (nearly 90% have now reported) that helped push year-over-year earnings growth for the index to 27.9%, the highest growth rate since the fourth quarter of 2010. On the earnings front, LPL Chief Investment Strategist John Lynch commented, “As strong as the earnings growth is, we are particularly encouraged by companies’ revenue growth. The strong top line performance, clearly boosted by a strong U.S. economy, is particularly impressive given there is no direct benefit from the lower corporate tax rate.”

Foreign index returns were more of a mixed bag, with regional benchmarks in Europe up modestly for the week as they mostly tracked their U.S. counterparts. Meanwhile, equities in Asia struggled to advance. Weakness in China kept emerging markets stocks under water on the week, but the MSCI Emerging Markets Index remains up more than 3% in November. Ongoing efforts by officials in China to support economic growth as it starts to feel the impact of U.S.-imposed tariffs, record corporate defaults, and stock market weakness were met with skepticism. Most notably, an unprecedented move that requires at least one-third of new loans be made to non-state owned firms sparked concerns that the move would only make matters worse as banks may provide lending to unworthy borrowers to meet quotas.

Turning to next week, earnings season begins to taper off as only twelve S&P 500 companies are slated to report earnings. On the economic front, U.S. industrial production, retail sales, consumer price inflation (CPI), and business inventories are due out. Overseas, Japanese third-quarter gross domestic product data will be released, in addition to CPI readings out of Germany, France, and the composite Eurozone. Track these and other important events on our Weekly Global Economic & Policy Calendar.

 

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