Weekly RecapFor the week ending October 18, 2019

Ryan NaumanMarket StrategistInforma Financial IntelligenceRyan.Nauman@Informais.com

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Sources: Zephyr StyleADVISOR, MacroBond, PSN Enterprise, Bloomberg. 1 week data as of 10/18/19, unless otherwise stated, time periods over 1 week as of 9/30/19. Equity Style Performance represented by: Large Value – Russell 1000 Value, Large Blend – Russell 1000, Large Growth – Russell 1000 Growth, Mid Value – Russell MidCap Value, Mid Blend – Russell MidCap, Mid Growth – Russell MidCap Growth, Small Value – Russell 2000 Value, Small Blend – Russell 2000, Small Growth – Russell 2000 Growth. Fund flow data (EPFR Global) 10/9/19 –10/16/19, S&P 500 (Large Cap Blend flows), Russell 3000 (all U.S. equity flows), Russell 1000 (all Large Cap flows), Russell Mid Cap (all Mid Cap flows), Russell 2000 (all Small Cap flows), MSCI EAFE (Western Europe DM, Asia Pacific DM flows) MSCI EM (All Emerging Market flows), MSCI World (All Developed Markets flows)

Global Asset Class Performance

Index 1 Week 3-Mos YTD 1 Year 3 Year Flows (mil)S&P 500 0.55% 1.70% 20.55% 4.25% 13.39% $2,532

Russell 3000 0.56% 1.16% 20.09% 2.92% 12.83% $4,290

Russell 1000 0.49% 1.42% 20.53% 3.87% 13.19% $3,753

Russell MidCap 0.56% 0.48% 21.93% 3.19% 10.69% ($1,762)

Russell 2000 1.57% -2.40% 14.18% -8.89% 8.23% $240

MSCI EAFE 1.24% -1.00% 13.35% -0.82% 7.01% ($265)

MSCI EM 1.27% -4.11% 6.23% -1.63% 6.37% ($1,396)

MSCI World 0.74% 0.66% 18.15% 2.42% 10.82% $1,124

1 Mos Value Blend GrowthLarge 3.57% 1.73% 0.01%

Mid 4.06% 1.97% -1.14%

Small 5.13% 2.08% -0.82%

YTD Value Blend Growth

Large 17.81% 20.53% 23.30%

Mid 19.47% 21.93% 25.23%

Small 12.82% 14.18% 15.34%

Factor Index 3 Mos YTD 1 YR Risk-Adj %

MSCI USA Small Cap -1.17% 17.22% -2.80%

MSCI USA Value 1.86% 17.07% 4.75%

MSCI USA Minimum Volatility 4.28% 24.15% 20.08%

MSCI USA Momentum 0.88% 20.97% 1.97%

MSCI USA Quality 2.52% 24.79% 7.57%

MSCI USA Dividend Tilt 3.24% 19.54% 7.40%

Index 1 Week 3-Mos YTD 1 Year 3 Year YieldBloomberg Barclays US Aggregate 0.10% 2.27% 8.52% 10.30% 2.92% 2.30

Bloomberg Barclays US High Yield 0.39% 1.33% 11.41% 6.36% 6.07% 6.32Bloomberg Barclays Municipals 10 Yr -0.16% 1.42% 6.86% 9.09% 3.16% 1.69

Major Equity Asset Class Performance Equity Style Performance Equity Factor Performance

10/18/19 10/11/19 9/30/19 12/31/18 10/18/18 10/18/162-yr U.S. Treasuries 1.58 1.63 1.63 2.48 2.87 0.8210-yr U.S. Treasuries 1.76 1.76 1.68 2.69 3.17 1.7530-yr U.S. Treasuries 2.25 2.22 2.12 3.02 3.36 2.5110-yr German -0.40 -0.49 -0.57 0.24 0.49 0.0110-yr Japan -0.17 -0.21 -0.23 0.00 0.13 -0.0610-yr U.K. 0.63 0.63 0.41 1.27 1.55 1.08

Major Equity Asset Class Performance

Rates

Chart of the Week – Bond Correlations vs S&P 500 (6-Month Moving Windows) Zephyr StyleADVISOR Zephyr Associates

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TimeMar 2015 Dec 2015 Jun 2016 Dec 2016 Jun 2017 Dec 2017 Jun 2018 Dec 2018 Sep 2019

ICE BofAML US High Yield Bloomberg Barclays Global AggregateBloomberg Barclays U.S. Aggregate Bloomberg Barclays U.S. Treasury: 7-10 Year

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ThemeEconomic Data

The Empire State Index came in at 4 in October from 2 in September.

The IMF revised its World Economic Outlook lower to 3.4% for 2020 from 3.5%.

Retail sales fell 0.3% in September, marking the first decline in seven months.

Home builders’ index rose to 71 in October from 68 in September, marking a 20-month high.

Housing starts fell 9% in September to an annual rate of 1.26 million. Additionally, building permits fell 3% to an annual pace of 1.39 million. Despite the decrease in permits, the level is nearly 8% higher than a year ago.

The Philadelphia Federal Reserve manufacturing index fell to 5.6 in October from 12 in September.

The industrial production index fell 0.4% in September, additionally, the industrial output for the third quarter increased at a 1.2% annual rate.

Industrial capacity fell to 77.5% in September from 77.9% in August.

The leading economic index fell 0.1% in September, marking the second straight month of declines.

Earnings Below are some of the headline beats, misses, and mixed results from the week. Beat earnings and revenue estimatesUnitedHealth Group, Johnson & Johnson, J.P. Morgan Chase, Citigroup, Charles Schwab, United Airlines Holdings, Bank of America, Netflix, CSX Corp., Morgan Stanley Mixed resultsGoldman Sachs Group, Wells Fargo, Abbott Laboratories, International Business Machines, Philip Morris International, Honeywell International Missed earnings and revenue estimatesUnion Pacific

Trade The Wall Street Journal reported that questions remain regarding how much more China will purchase in U.S. agriculture goods. Additionally, Bloomberg News reported that China wants U.S. tariffs on Chinese goods rolled back before agreeing with the purchases. President Trump said that a deal probably will not be signed until he and Chinese President Xi Jinping meet next month. China continues to emphasize that the U.S. must roll back tariffs on Chinese goods in order for the two sides to finalize a trade agreement.

Key Themes – Equities Rise on Solid Start to Earnings Season

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Earnings Season

As of Friday, October 18, 15% of the S&P 500 companies have reported third quarter earnings. 84% of the reporting companies beat earnings estimates, which is above the 5-year average, while 64% posted better-than-expected sales, which is above the 5-year average. Overall, earnings are 2.6% higher than estimates, which is below the five-year average. Currently, earnings growth is on pace to come in at -4.7%, which would mark the third straight quarter of negative earnings growth if it continues to remain negative. Additionally, revenue growth stands at 2.6%, which would mark the lowest growth rate since Q2 2016 (-0.2%), if this rate stands for the entire quarter.

The solid market performance during the year has lifted valuations for the S&P 500 index. The current forward p/e ratio sits at 17.0, which is above the 5-year average of 16.6 and above the 10-year average of 14.9. Financials remain the most attractive sector in terms of forward p/e, coming in at 12.2, which is below the sector’s 5-year (12.9) and 10-year (12.3) averages.

To date, the blended profit margin for the third quarter is 11.3%, which if this continues will mark the first time the index has reported three straight quarters of year-over-year declines in net profit margin since 2009. Profit margins for the S&P 500 companies remain under pressure as the year-over-year top line (revenue) growth for companies is 2.6% for the quarter, while the bottom line (earnings) year-over-year growth stands at -4.6%.

Looking Ahead

With Halloween just two weeks away, now seems like a good time to see if markets may trick investors or treat them in the fourth quarter and in 2020.

Uncertainty continues - Much like the first three quarters of 2019, uncertainty and volatility will continue for the remainder of the year and well into 2020. Despite the phase one trade deal, lingering trade worries will persist until we get a meaningful signed agreement. Additionally, 2020 marks an election year, which is guaranteed to be full of theatrics. Finally, geopolitical concerns will continue into 2020 and will pose as a potential black swan risk in 2020.

No recession - Despite rising risks of recession, such as the weak manufacturing sector, soft business spending, slowing labor market, and slowing global growth, I believe the strong consumer and accommodative Federal Reserve will keep the economic expansion alive through 2020.

Global growth will continue to slow - Even if the current tariffs are rolled back in the event a trade agreement gets completed, I believe it may take some time for the easing trade tensions to provide a boost to global economies.

Corporate Earnings – I look for S&P 500 earnings growth to recover in 2020 and post mid to high single digit earnings growth.

Overweight U.S. equities - The U.S. economy remains in better shape than others, earnings growth looks to rebound, and the Federal Reserve will remain accommodative.

Play defense - Continue to invest in sectors that perform well late in the cycle. Focus on quality names with solid balance sheets, strong cash flow, sustainable growth and who pay consistent dividends.

Perspective from 6,237 feet

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All Eyes On……..

Day Event/Earnings

Monday, October 21

None scheduled

Haliburton

Tuesday, October 22

U.S. Existing Home Sales (September)

UBS, Kimberly-Clark, Chipotle, Hasbro, Whirlpool

Wednesday, October 23

None Scheduled

Ford Motor Co., Caterpillar, AT&T, Eli Lilly & Co., Anthem Inc.

Thursday, October 24

U.S. Durable Goods Orders (September), Core Capex Orders (September), Markit Manufacturing PMI (flash) (October), Markit Services PMI (flash) (October), New Home Sales (September)

Southwest Airlines, Intel, Twitter, Stanley Black & Decker

Friday, October 25

U.S. Consumer Sentiment Index (October)

Verizon Communications, Barclays, Anheuser-Busch InBev

Economic data releases for the upcoming week are a little light. We will get the initial Markit manufacturing and services PMI readings, which will be widely watched, particularly the services PMI. Recent housing data releases have shown promise, and we will see if the trend continues this week.

Meanwhile, the third quarter earnings cycle continues to roll along.

About Ryan Nauman

As Market Strategist, Ryan Nauman’s primary focus is providing value added market and investment insight along with educating buy-side participants on investment analytics and portfolio management concepts.

Ryan provides analysis and research on market trends across asset classes, sectors, and regions to help empower better decisions for creating asset allocation strategies. His insight is disseminated through white papers, articles, training, and interviews with a target audience of financial advisors, portfolio managers, and investment analysts.

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