Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Volatility has returned to begin October and Q4. Following a weak September ISM manufacturing number on Tuesday, the S&P 500 experienced back-to-back 80%+ declining volume days, during which the key 2940 breakout level was undercut. Selling pressure continued following the disappointing ISM non-manufacturing number this morning that pushed the S&P 500 to oversold levels in the short term. The market's ability to shake off the latest weak economic reading so far today and bounce from oversold levels is a good start, particularly as the more technology-oriented names are leading the way. Also contributing to the rally today is a view that the Fed stands by to support the economic outlook, as it has stated. The market-implied odds of a Fed rate cut on October 30th have spiked to 90% (from 40% on Monday), and the odds of two rate hikes by year-end are now up to 60%.
As for the weak manufacturing number, it is important to remember that manufacturing is just ~11% of US GDP, and services represent ~80%. The services side of the economy remains solid; and although ISM non-manufacturing did come in lower than estimates, it remains positive. Additionally, the September jobs report comes out tomorrow, which could reassure investors about employment trends. We continue to view the consumer in good shape, which remains supportive of the economy.
Over the intermediate-term, the technical backdrop remains intact, and we view the current market action as a normal pullback for now. We look to the 200 day moving average (DMA) at 2839 as technical support, followed by horizontal support in the 2822-2800 area. As a reminder, the S&P 500 has experienced two 6-7% pullbacks this year; and a similar current pullback would put the downside in this range mentioned. This level also represents a 17.4x P/E, which coincides with the average P/E seen year to date and is fair heading into trade discussions and earnings season.
Trade and earnings season will be the most influential factors for market participants to monitor in the coming weeks, with trade being the biggest item that will sway the market one way or the other. US and China officials are set to meet in DC on October 10th, where optimism has grown for momentum toward a potential mini-deal when Presidents Trump and Xi are scheduled to meet on November 16th. In the end, it is not in President Trump's best interest to come down too hard on trade a year out from his re-election campaign. He knows that he needs a good economy and good equity market in the lead up to next Fall. Our base case outlook is for the Fed to provide support to the slowing macro and trade disputes, and we expect a mini trade deal or agreement that will be market positive (although it is probably not a smooth process).
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