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Markets End Mixed on Earnings

Markets ended a fairly bullish week mixed, gaining in some sectors, while others fell to earnings jitters. The S&P 500 notched a new high, while the Dow finally reached a record close.[1] For the week, the S&P 500 gained 0.11%, the Dow gained 0.29%, and the Nasdaq lost 0.54%.[2]

Earnings season hit the halfway point and some analysts are giving the performance a barely passing grade. While corporate profits are healthy, they are being achieved through cost cutting and accounting acrobatics rather than revenue growth. Barely half of S&P 500 companies that have reported in have beaten estimates, highlighting the fact that U.S. firms are still struggling with weak demand and slow economic growth.

Of course, there are some bright spots such as in the tech sector, where third-quarter earnings growth is expected to hit 5.81%, as compared to estimates of 2.6% at the beginning of the season. Consumer discretionaries are another strong point, led by double-digit growth from retailers.[3]

The Federal Reserve held a scheduled FOMC meeting last week, but decided to delay any taper of its bond-buying program for another day. This was not unexpected since the government shutdown caused the delay of critical economic reports and data collection, leaving Fed economists without a clear picture of the current state of the economy. While the Fed has one more meeting left in 2013, it’s looking increasingly unlikely that they’ll initiate tapering while the country is still recovering from Washington’s actions.

We expect that the earnings season will occupy investors’ attention this week as they look for confirmation of the market rally. We’ll also get a look at the October jobs report and an advance third-quarter GDP estimate. It’s hard to know how investors will view these reports since the effects of the government shutdown will have skewed results. Although we don’t yet have any complete information about the costs of the shutdown, one report suggests that it took a $24 billion chunk out of the economy.[4] This may mean that fourth quarter growth may slow down and that people who lost wages may not be spending as much on holiday shopping.

ECONOMIC CALENDAR
Monday: Factory Orders
Tuesday: ISM Non-Mfg. Index
Wednesday: EIA Petroleum Status Report
Thursday: GDP, Jobless Claims
Friday: Employment Situation, Personal Income and Outlays, Consumer Sentiment, Ben Bernanke Speaks 3:30 PM ET

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov . International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES

U.S. factory growth fastest in 2 ½ years. The manufacturing sector expanded at its fastest pace since April 2011 in October. The growth was unexpected and could signal a strong start to the fourth quarter.[5]

Eurozone inflation slumps to near four-year low. Inflation in Europe fell to 0.7% in October, shocking economists and increasing pressure on the ECB to ease policy to combat high unemployment.[6]

Economists slash U.S. growth estimates. Economists cite the effects of the drawn-out government shutdown on economic activity and have cut their estimates of U.S. GDP growth in the 3rd and 4th quarter to 2.3% and 3.0% annualized growth, respectively.[7]

Gasoline price volatility spikes. Local gasoline prices are swinging drastically due to fuel distribution problems. Refiners keep stocks of gasoline low to save money, increasing the system’s vulnerability to temporary shocks that can affect prices. [8]

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The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

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[1] http://money.cnn.com/2013/10/29/investing/stocks-markets/

[2] http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-october-28-2013.htm

[3] http://www.foxbusiness.com/investing/2013/10/28/first-half-earnings-season-leaves-investors-craving-more/

[4] http://money.cnn.com/2013/10/16/news/economy/shutdown-economic-impact/

[5] http://www.reuters.com/article/2013/11/01/us-usa-economy-idUSBRE99L04G20131101

[6] http://blogs.reuters.com/macroscope/2013/10/31/shock-low-euro-zone-inflation-what-the-economists-say/

[7] http://www.businessinsider.com/societe-generale-slashes-us-gdp-forecast-2013-10

[8] http://www.usatoday.com/story/money/business/2013/11/02/volatile-prices-at-gas-pumps-give-drivers-whiplash/3380325/

 

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