U.S. MARKETS FLYING HIGH

The S&P 500 has hit record highs, in part boosted by corporate earnings. 

While so far this year 75 percent of the S&P 500 companies posting earnings beat estimates, U.S. company earnings are on pace to post a 2.4 percent decline in the third quarter according to FactSet.

Trading volume, however, is relatively low, and company share buybacks year-to-date are up 25 percent this year, which increased 28 percent in the third quarter.

Again, as we’ve noted, the markets are being driven by massive injections of monetary methadone. The New York Fed purchased $55 billion in T-bills and $7.5 billion in mortgage-backed bonds from eligible banks on Wednesday night – in essence a short-term loan collateralized by bonds, giving the gamblers another shot of cheap money.

Andrea Iannelli, an investment director at Fidelity International, said, “The Fed is one of the few central banks that has meaningful room to cut rates, and they function as an insurance against drawdowns in riskier assets.” 

TREND FORECAST: We maintain our forecast that the U.S. Federal Reserve will lower interest rates to zero and/or negative territory by this time next year and continue to flood the markets with cheap money with extended quantitative easing and repo injections.

In the third quarter, GDP increased 1.9 percent. It was pushed up by consumer spending, which rose 2.9 percent from the third quarter but was down from 4.6 percent the second quarter. 

On a broader range, business spending – including building, equipment, and research and development costs – dropped 3 percent and investment in offices and factories spaces dropped 15.3 percent.
 
Notably, the annual rate of productivity in the non-farm business sector weakened, with labor productivity dropping 0.3 percent in the third quarter of 2019.

Productivity is the difference between output (goods and services produced) and hours worked on the job. Since 2007, U.S. productivity averaged 1.3 percent, compared with 2.1 percent since the World War II ended.

The lower the productivity rate, the less efficient the economy.

The annualized rates of hours worked increased 2.4 percent, while output only rose 2.1 percent. Productivity in the third quarter increased 1.4 percent from the same time period as 2018.

Losing the Trade War 

Despite President Trump’s pledge to reverse the negative trade deficit, imports for goods and services leaped 5.4 percent, up $17.8 billion to $481.3 billion in the third quarter of 2018. 

Exports fell by 0.4 percent ($7 trillion) from the previous year.