Market Update: Thurs, Oct 31, 2019 | LPL Financial Research

Daily Insights

A Fed-fueled record high. Stocks are lower this morning after the S&P 500 Index closed at a record high yesterday. Pessimistic trade headlines have taken some air out of equities after investors cheered the Federal Reserve’s (Fed) third rate cut of the cycle, along with Fed Chair Jerome Powell’s positive economic messaging and commitment to flexibility in deciding future policy changes.

Three and done? We think this could be the last rate cut for a while, even though Powell avoided stating this outright in his post-meeting press conference. The clearest hint was policymakers’ removal of language stating they would “act as appropriate to sustain the expansion.” Going forward, the Fed will now “assess the appropriate path of the target range for the federal funds rate.” Today on the LPL Research blog, we’ll break down yesterday’s Fed decision, and highlight why we think Fed policy could be due for a pause.

Core PCE growth slips. Core personal consumption expenditures (PCE), which exclude food and energy prices, rose 1.7% year over year in September, slowing from August’s 1.8% pace. Consumer inflation is still manageable, even though it’s squarely below the Fed’s 2% growth target. Fed Chair Jerome Powell hinted Wednesday that while inflationary pressures are still contained, a global recovery could lift activity and help fuel pricing growth to reach that target. However, he noted the Fed would need to see a significant and persistent move up in inflation before hiking rates.

An update on developed-market equities. Developed international equities’ valuations look tempting, with the MSCI EAFE Index trading about 10 percentage points lower than its average discount to the S&P 500 over the past few decades. Compare that to the MSCI Emerging Market Index’s valuations, which are roughly in line with history. While global valuations favor developed international, fundamentals do not. We are encouraged by international equities’ performance recently, and we’re seeing better economic data out of Japan. However, we would like to see more sustained fundamental improvement before upgrading our cautious tactical view.

LPL Research on CNBC Power Lunch. LPL Financial Senior Market Strategist Ryan Detrick was on Power Lunch recently to discuss new highs and what could be in store the rest of this year. You can watch the interview here.

 

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