Earnings season kicked off strong this week with a diverse mix of companies beating expectations. Despite market optimism over the earnings beats by the big banks that reported, bank executives warned on lower interest rates weighing on future earnings. On the global front, the International Monetary Fund cut it’s 2019 GDP growth projections to 3.0%, down from 3.2% in a July forecast, citing global trade frictions. Across the pond, the EU and U.K. reached a tentative Brexit deal ahead of the EU leaders Summit in Brussels. The deal is still subject to Parliament’s approval and will be held to a crucial vote Saturday as leaders scramble to get a deal before the October 31st deadline.

On the race to zero among discount brokers, Fidelity followed suit this week dropping their commission rate on ETF and stock trades to zero to match Schwab and TD Ameritrade’s recent moves.

Weekly Returns

S&P 500: 2986 (+0.54%)
FTSE All-World ex-US (VEU): (+0.87%)
US 10 Year Treasury Yield: 1.76 (0.00)
Gold: $1,489.5 (+0.07%)
EUR/USD: 1.1171 (+1.17%)

Major Events

• Monday – September exports to the U.S. from China dropped 22% due to tariffs imposed.
• Tuesday – Earnings season kicked off with strong reports from JP Morgan, United Health, and Johnson & Johnson.
• Wednesday – U.S. retail sales for September came in weaker than expected. The Commerce Department cited consumer spending cuts on building materials, online purchases and automobiles as the cause.
• Thursday – Housing starts fell from a 12-year high with a decline of 9.4% for September partly due to a decline in construction of multi-family housing.
• Friday – China’s economy growth came in at the slowest pace in almost 30 years with GDP growth coming in at 6%; below the expected 6.1%.
• Friday – Saudi Aramco delayed its initial public offering for at least a few weeks over doubts about its $2 trillion valuation. The delay will allow Q3 results to be incorporated into assessments of the company’s valuation.

Our Take

There’s been a lot of hype in recent weeks after Schwab made the first move to cut their brokerage commissions rate to zero. TD Ameritrade reacted within hours of the announcement by immediately matching them and this week Fidelity also dropped commission fees to zero. This was a pretty drastic and hasty move for a relatively large business decision, showing risk of a competitive disadvantage.

Increased competition is good for consumers, so this is a win for the investing public in that it brings trading costs down, but it begs the question… How do brokerage firms with a core business model centered around charging fees for trading plan to make any money if their fees are now zero?

The reality of it is, it’s more of a magic trick of moving money from the left pocket to the right pocket. Brokerage firms make money on all aspects of a trade taking place, not just the transaction fee itself. The most common way is payment for order flow, but they also make interest on things like the cash of unsettled trades in your account. These aspects will likely absorb some of the revenue lost from commissions, but most likely most of it will be shifted to other aspects of the business-like cash products and robo platforms. These firms are going to have to get creative with where they shift this lost revenue to outside of their brokerage sleeve. The bottom line is, this is good news for investors, but nothing in life is truly free so be cognizant of what you are paying no matter where the fee is coming from.