It is a light economic calendar in a holiday-shortened week. Political headlines and the government shutdown will dominate financial news. Earnings reports are more important for investors, so we should focus there. I also recommend several key themes. We should all be watching closely as….

The Real-Time Economic Lesson Continues.

I hope we can analyze stocks instead of political controversies in the week ahead.

Last Week Recap

In my last edition of WTWA I asked whether earnings reports would change the gloomy “message” of the markets. That was the right question, and earnings seem generally in line with continuing modest economic growth.

John Butters (FactSet) reports on the earnings season so far, with 11% of the S&P 500 reporting. The earnings “beat rate” is 76% and the revenue beat rate is 56%. The growth rate is currently 10.6%. On the negative side is the movement in 2019 forecasts. Estimates for the first half of the year have declined 4.5%, more than the recent average decline of 2.4%. Here is a chart showing the movement in both estimates and price over the last few months.

Brian Gilmartin notes that year-over-year growth for 2019 is now expected as 5.5%. He also breaks down the market by sector size, showing the impact of each.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski. She includes a lot of relevant information in a single picture – worth more than a thousand words. Read the full post for more great charts and background analysis.

Stocks gained 2.9% with another week of lower volatility. The trading range was barely higher – same as last week. You can see the results compared to some past data in our indicator snapshot (below).

Noteworthy

Trade issues are paramount in the list of global economic concerns. There are many misunderstandings about the impacts of current trade policies as well as possible changes. Visual Capitalist highlights five important ways that globalization is changing. The complete infographic provides details about the surprising changes:

1. A smaller share of trade is across borders.
2. Services trade is growing 60% faster than goods trade.
3. Labor cost arbitrage is less important.
4. R & D and innovation are more important.
5. Trade is more concentrated with regions.

This small section highlights the key implications.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

The calendar is very light in a shortened week. Some government data is not being reported during the shutdown. Leading indicators and some housing data are privately provided, so there is still something.

Much more exciting for markets will be the second big week of important earnings reports for Q418.

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.

Next Week’s Theme

The continuing government shutdown will attract plenty of media attention; it is starting to filter into stories about market and economic effects. For financial markets, earnings reports should take center stage.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

Short-term trading conditions have improved another notch, but not yet enough to signal an “all clear” for our trading methods. Finding the right trading environment is important. Patience is an essential part of trading success. The “neutral” reading indicates that some very short-term methods may have a chance of success.

Long-term trading remains solidly at the highest risk level. Those who emphasize technical analysis have emphasized the “damage” done to charts by the sustained correction. Our methods show that a clean bill of technical health will require some time.

Fundamental analysis remains strongly bullish. Earnings are great, prices are lower, and there is even less competition from bonds. We reduce fundamental positions (as we did in 2011) when we get a warning from the recession or financial stress indicators, not merely as a reaction to technical signals. At this point there are no significant fundamental warnings. We remain fully invested in fundamental programs, illustrating that a diversity of methods leads naturally to differing levels of market exposure.

Current Thoughts

Here are a few key themes for investors to watch:

• What I have called the real-time lesson in economics continues. Tariff effects are showing up in both earnings and stock prices. Could it be, just possible, that centuries worth of economic study on this subject are correct? Benn Steil and Benjamin Della Rocca write Trump’s Tariffs Are Killing American Steel. Read the article for details, but this chart captures the story.

• The shutdown is having a gradual but cumulative effect. The number of federal workers seeking jobless claims has doubled. Let’s hope this real-time lesson does not take to long to get through. The weekend effort at a compromise did not get any traction. What’s next?
• Brexit threatens serious European disruption. This real-time lesson shows the consequence of a referendum when the issues and effects were difficult to predict. Simplification is a good way to get votes, but not to make policy.
• What about debt? If a divided government cannot reach a compromise on the shutdown, what hope is there for the large deficits? This is another real-time economics lesson.

Investment Ideas

Despite this list of key concerns – short compared to those of many who see problems everywhere – the current investment climate is attractive. A reader asked how I could be “optimistic.” Not so, I replied. I am realistic. Decades of experience show that win/win situations are resolved. Solutions are more difficult to see than problems. Observing last week’s reactions to trade headlines, the effect of any movement on these issues is quite positive. And these are just rumors. I expect a solid rally when the trade issues are resolved, even though most will decry the result. (Some will say it is too much, and some not enough).

My training, experience, and results in forecasting such matters is pretty good. Skeptics might compare my take with that of Dr. Henry Kissinger in his briefing for KraneShares China.

The main takeaways from Dr. Kissinger’s comments were as follows:

• History and experience both indicate that countries must be very careful about how they interact in order to avoid negative unintended consequences.
• The current US/China trade dispute is likely to be resolved because both sides need a successful resolution and have already shown signs of compromise.
• However, the US and China need to recognize that the current state of US/China relations is delicate and both sides must work hard to establish channels of communication which prevent small disputes from becoming large ones and permit the successful resolution of future disagreements.

The rest of that post has excellent information on a range of topics. It is well worth reading.