The major indexes are on track to start today’s session modestly in the red. But the value of pre-open indicators and sentiment has gone down a lot in the current environment of heightened macro uncertainty.
It’s no surprise that stocks have been so jumpy lately given the uncertainty about the global growth backdrop and Fed policy. The Fed aspect of this uncertainty doesn’t have that many potential outcomes – we know members are on track to start the tightening process in the not-too-distant future. But even if we don’t get lift-off next week, it will most likely be at the December FOMC meeting.
Beyond the lift-off, the uncertainty is how long will it take the Fed to ‘normalize’ interest rates. What all of this means is that while the Fed issue will be with us for some time, the course will get somewhat clearer next week.
The growth question is hard to answer in any meaningful way in the near term, notwithstanding the Chinese Prime Minister’s assurances at the World Economic Forum yesterday. Chinese stocks appear to have stabilized – the Shanghai composite was up today, with the index ending the week in positive territory for the first time in about a month.
But legitimate questions remain about the country’s growth outlook even if it isn’t headed for a hard landing, as the Chinese Premier announced. The issue of whether that country’s economy grows at the government’s targeted 7% rate or much lower than that isn’t an academic exercise. Such a slowdown has consequences for the global economy, and that has a bearing on a host of operators ranging from the makers of branded, differentiated gadget makers like Apple (AAPL) to commodity producers like ExxonMobil (XOM).
This growth uncertainty will remain with us for some time and will likely be a key point of interest for market participants in the Q3 earnings season, whose early reports will start arriving next week. Overall earnings growth is expected to be as tepid in Q3 as was the case in the Q2 earnings season, with total earnings for the S&P 500 index expected to be down -5.5% from the same period last year on -4.4% lower revenues. The set of headwinds weighing on growth - oil weakness, dollar strength and global growth questions – is unchanged from the preceding quarter.
Next week’s Fed announcement will likely push us out of the current prevailing narrow range, but a sustained breakout will require clarity on the earnings question. And the earnings uncertainty is a direct function of the global growth questions, particularly China’s.
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