Markets Gain Despite Mixed Reports

A better than expected start to the Q3 2019 earnings season served markets well, pushing the S&P 500 to its second consecutive winning week. Strong early results from the healthcare sector and industrial names, which have been battered by concerns over increased government regulation and weak global economic growth, respectively, managed to offset weak reports on U.S. retail sales and China GDP. Despite a Friday sell-off, the S&P hung on to post a weekly gain of 0.54%.

Healthcare and Industrials Beat Estimates

The healthcare sector kicked off earnings reports this week with strong results from UnitedHealth Group. Driven by growth in its health services and insurance units, UnitedHealth posted earnings of $3.88 a share, topping analyst estimates of $3.75 a share. Sales climbed 6.70% from the year ago period to $60.35 billion. In the industrial sector, Kansas City Southern proved that rail transport remains profitable. Helped by an increase in refined fuel products and liquid petroleum gas shipments to Mexico, along with lower overall costs, KSU reported earnings per share of $1.81, up from $1.70 in the year ago quarter. Meanwhile, sales were up 7% to $747.7 million. The company’s results were encouraging as they come at a time when freight volumes have been under pressure from the global economic slowdown.

Retail Sales Drop Unexpectedly

Consumers pulled back on their spending in September with retail sales falling -0.30% to $525.6 billion. The dip comes after an especially strong August which saw sales revised up to 0.60% from a previously reported increase of 0.40%. The September retail sales decline was driven by a drop in spending on building materials, online purchases, automobiles, and gasoline. Excluding autos, gasoline, building materials, and food services, retail sales remained relatively unchanged for the month. While the spending decline may have been unexpected, it is not necessarily a cause for alarm given that consumers had strung together six consecutive months of spending increases. It is also natural for shoppers to pull back on spending in advance of the busy holiday shopping season. According to the National Retail Federation, holiday retail sales are expected to grow between 3.80% and 4.20%. That range would be above the average of 3.70% seen over the past five years.

China GDP Hits New Low

China’s GDP rose “just” 6% in the third quarter – its worst showing in three decades. That was a deceleration from the 6.20% growth rate reported in the April-June period. The combination of a broader, global economic slowdown along with U.S. tariffs on Chinese goods continue to weigh on the country’s growth where exports and fixed-asset investment remain weak. Although the U.S. and China have struck an initial agreement towards a phased trade deal, trade alone is unlikely to elevate the Chinese economy any time soon and the Chinese Central Bank appears to be readying additional stimulus for their economy.

Market indices faded into the close on Friday, deflated by poor news from index heavyweights Boeing and Johnson & Johnson. Boeing disclosed some alarming evidence related to its pilots having unintentionally misled regulators during the 737 Max certification process, while Johnson & Johnson recalled its baby powder for asbestos contamination at a time when it is defending itself against lawsuits spanning decades claiming the same. While these company specific announcements dragged the broader indexes down on Friday, earnings season is off to a stronger start than anticipated. While it is still early, of the companies that have announced, about 84% have beat estimates. That’s well above the long-term average of 65%. A better than expected earnings season, coupled with a strong consumer and accommodative Fed, is likely a big reason markets remain just below all-time highs despite the uptick in geopolitical risk emanating from the impeachment investigations, the Middle East and Brexit.

The Week Ahead