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Stocks Stabilize Higher, Earnings Octane Trumps the Four Big Threats, Khashoggi Matters, Valuations Get Interesting…….This week’s…. 7 Things To Know About The Markets And The Economy

  1. Market Stats: This week strong earnings and economic data won the tug of war over the market's four biggest threats: geopolitical concerns, trade concerns, threats of rising interest rates and midterm election concerns. The Dow and the S&P 500 had their first positive closes in four weeks. Next week will be a pivotal for stocks as earnings season accelerates, 70% of the S&P 500 still has to report earnings. We will see if excellent earnings can continue to stabilize the markets.  Bonds closed mixed on the week. The rise in interest rates was temporarily halted due to mixed economic and inflation reports. 
  2. Chart of the Week: Market Swings of Over 1% Are Not Uncommon Especially in Mid-Term Election Years :  Daily market moves of 1% up or down occur an average of 62 times a year since 1980. This year, we have seen 39 such moves; below the historical average. In years where there are Mid-Term elections, the market has often exhibited a volatile nine months leading up to the election and then enjoyed a good fourth quarter. Why This Matters: Recent volatility can be viewed as somewhat normal through a historical lens and we could be probing for a level from which to rally into year end. We’re at valuation levels that should offer some support as well. See Valuations below.
  3. Valuations Best in 7 Years According to the PEG Ratio: If price is any indicator, the recent stock market rout could end soon. The reason: Stocks, at least by one important gauge, are the cheapest they have been in nearly seven years. The market is also significantly more attractively priced than it has been in other recent periods when stocks have struggled. The gauge is the so-called PEG ratio, which compares the price investors are willing to pay for expected earnings with how fast those earnings are expected to rise. The exact equation is to divide the market’s price-to-earnings ratio by expected earnings growth, which is where the name comes from. On Wednesday, the PEG of the S&P 500 Index dropped to just under 0.65, based on this year’s expected earnings, that’s the lowest annual average going back to late 2011.
  4. Correction Territory: It used to be that a 10% correction was considered “healthy” for a market to consolidate its gains. However, corrections  don’t feel “healthy.” Often the market will find support and recover once that 10% level is reached. Here’s a look at where major US equity markets stand in relation to their recent highs and intra-day lows, perhaps we are close….
  5. The Khashoggi Affair: President Donald Trump warned of “severe” consequences” for the disappearance of journalist Jamal Khashoggi, with his administration awaiting the conclusion of investigations. He added it “certainly looks” like the Saudi national is dead.  Treasury Secretary Steven Mnuchin said he will not be attending the “Davos in the Desert” event as pressure continues to mount on Saudi Arabia. Why This Matters: Ethics and criminality always matter to markets. This issues can have far ranging implications and comes at a time when there’s already too much antagonistic finger pointing among nations. The US could impose economic sanctions on the Saudis which could in turn result in reprisals affecting the oil markets. Investors are fretting Riyadh might use oil supplies as a political weapon in the event the West penalizes the Kingdom.
  6. Questionable Fed Tightening: Wednesday’s Federal Reserve minutes showed a majority of members favored an eventual (and temporary) interest rate move above what they deem the neutral level for the economy in the long run.  The Fed’s hawkish tone places the central bank on a collision course with President Donald Trump who launched an avalanche of criticism against the Fed after last month’s hike. Why It Matters: There is a growing chorus of money managers and economic types who also feel that the economic and inflation evidence to support higher interest rates is suspect. The interest rate futures market is also indicating that the Fed will not be able to increase rates as high as they may like.
  7.  What We’re Reading:
    • The Last Words of Jamal Khashoggi: What the Arab world needs most is free expression (Washington Post)
    • The Internet Apologizes: Even those who designed our digital world are aghast at what they created. A breakdown of what went wrong — from the architects who built it. (New York Magazine)
    • Amazon’s HQ2 announcement is imminent (Boston?). Here’s a look at the final contenders. (Recode)
    • Top 3 percent of U.S. taxpayers paid majority of income taxes in 2016.
    • Forget Stoners. The Real Money Is in Medical Marijuana (Bloomberg)
    • The New American Dream Home Is One You Never Have to Leave (New York Times)
    • Baby-boomer rock stars are still making tens of millions on tour (Quartzy)
    • Paul Allen, billionaire who co-founded Microsoft, dies at 65.