What could soothe mar­kets? Solid earn­ings, healthy eco­nomic re­ports


WASH­ING­TON — Af­ter a har­row­ing week for fi­nan­cial mar­kets, in­vestors will look for solid cor­po­rate earn­ings re­ports and healthy eco­nomic news over the next few weeks to calm things down.

This week, sharply higher bond yields, fears of faster rate hikes, and the prospect of a long trade war be­tween the United States and China prompted a two-day rout in the stock mar­ket. The Dow Jones In­dus­trial Av­er­age plum­meted 1,300 points on Wednesday and Thurs­day.

Even as the Dow re­gained al­most 300 of those points Fri­day, some ex­perts said in­vestors’ con­cerns haven’t been re­solved. But if fresh ev­i­dence emerges that the econ­omy re­mains healthy and grow­ing, and com­pa­nies are still churn­ing out ro­bust profit gains, the stock mar­ket may even­tu­ally push aside those fears.

“The ba­sic ques­tion ev­ery­body has to ask is, has the fun­da­men­tal si­t­u­a­tion de­te­ri­o­rated or not?” said David Kelly, chief global strate­gist for JP­Mor­gan Funds. “Un­less some­thing else goes wrong, volatil­ity will ul­ti­mately set­tle down and stocks will move up.”

The third-quar­ter earn­ings sea­son will in­ten­sify in the com­ing weeks and should show whether profit growth re­mains strong de­spite the mar­ket’s wor­ries. Earn­ings are pro­jected to grow nearly 20 per­cent from a year ear­lier, a healthy gain if slightly be­low the pre­vi­ous two quar­ters.

That could be a tough hur­dle to clear: 74 com­pa­nies in the Stan­dard & Poor’s 500 in­dex have al­ready said their earn­ings will come in be­low an­a­lysts’ es­ti­mates. That’s more com­pa­nies than nor­mally is­sue such warn­ings.

“Keep in mind that the an­a­lysts have set the bar re­ally high for the (third quar­ter) earn­ings sea­son,” David Rosen­berg, chief econ­o­mist at Gluskin Sh­eff, wrote in a note to clients.

Just as im­por­tantly as the num­bers, in­vestors will fo­cus on what com­pany ex­ec­u­tives say about the im­pact of the U.S.-China trade fight, higher in­ter­est rates, and other chal­lenges fac­ing the econ­omy. Talk of threats to fu­ture profit growth could jar in­vestors and off­set any pos­i­tive vibe from good num­bers for the quar­ter just past.

The trade is­sue “is go­ing to be a huge fo­cus,” said David Joy, chief mar­ket strate­gist at Ameriprise.

That’s be­cause it’s still not clear what the long-run im­pact of the tar­iffs will be. Will Amer­i­can multi­na­tion­als, such as Cater­pil­lar, Ap­ple and GM, start to shift some of their pro­duc­tion out of China? Will they start to raise prices on more prod­ucts to off­set the cost of the du­ties?

“Break­ing down global sup­ply chains is in­fla­tion­ary,” Rosen­berg said.

Those con­cerns are ris­ing be­cause econ­o­mists in­creas­ingly ex­pect the Trump ad­min­is­tra­tion’s fight with China to con­tinue for the fore­see­able fu­ture. Many in­vestors and busi­ness ex­ec­u­tives have pre­vi­ously as­sumed that the ad­min­is­tra­tion’s tar­iffs were in­tended to win short-term con­ces­sions.

But un­like Trump’s other fights with coun­tries like Canada, which fo­cus on spe­cific tar­iffs and spe­cific prod­ucts, the ad­min­is­tra­tion’s com­plaints with China are cen­tered on more sweep­ing is­sues such as in­tel­lec­tual prop­erty rights and that coun­try’s in­dus­trial pol­icy.

“We ex­pect this to be quite pro­tracted,” Joy said. “These are re­ally big, strate­gic geopo­lit­i­cal is­sues that aren’t eas­ily solved.”

Pres­i­dent Trump and China’s Pres­i­dent Xi Jing­ping are now sched­uled to meet at an in­ter­na­tional fi­nan­cial sum­mit in late Novem­ber. If the two lead­ers can agree at that meet­ing to hold off on fur­ther im­port taxes while they iron out their dif­fer­ences, that could give the mar­kets a boost, Joy said.

Some eco­nomic re­ports next week may also as­suage in­vestors’ con­cerns — or fuel them. A re­port on re­tail and restau­rant sales will show if con­sumers are still spend­ing at a healthy clip. Ex­pec­ta­tions are high: An­a­lysts fore­cast that sales grew 0.6 per­cent in Septem­ber, af­ter barely ex­pand­ing the pre­vi­ous month.

And on Fri­day, the Na­tional As­so­ci­a­tion of Re­al­tors will re­port on sales of ex­ist­ing homes last month. Sales have fallen 1.5 per­cent in the past year, as sharp price in­creases have out­paced wage gains, leav­ing many po­ten­tial home-buy­ers un­able to af­ford a pur­chase.

And now mort­gage rates have jumped to their high­est level in seven years, mak­ing houses less affordable. The av­er­age rate on a 30-year fixed mort­gage rose to 4.9 per­cent this week, from 3.9 per­cent a year ago.

The re­tail and home sales data could be dis­rupted by the im­pact of Hur­ri­cane Florence, which tore through the Caroli­nas in Septem­ber. Hur­ri­cane Michael won’t show up in the data un­til next month.

Still, econ­o­mists fore­cast that home sales in Septem­ber will de­cline again.

Slow­ing hous­ing sales have al­ready wor­ried some econ­o­mists, who see it as a sign that the eco­nomic ex­pan­sion may not last that much longer.

“I think of hous­ing as the ca­nary in the coal mine,” said Diane Swonk, chief econ­o­mist at Grant Thorn­ton.

AP file photo

Spe­cial­ist Gregg Maloney works at his post on the floor of the New York Stock Ex­change Wednesday.

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