Stocks had their worst day in almost two weeks yesterday, although they finished off their lows.

Part was due to profit taking and month-end rebalancing. Part was due to suggestions that trade talks with China were getting bogged down. I think anyone who has more than modest expectations regarding likely trade agreements is probably overly optimistic anyway. Corporations have shown to be fairly resilient to tariff costs so far. Headlines seem to be moving markets a bit more than reality. Finally, the Chicago PMI, a regional index for manufacturing activity, was surprisingly low in September.

We will get a lot more data today, the first day of the new month. National manufacturing data will be released at 10am. We will also see the October employment report.

Another factor hitting markets yesterday was the aftermath of the Fed rate decision on Wednesday. Fed Chair Jerome Powell rather strongly suggested that any further cuts would be data dependent. Dovish investors who want to see more cuts didn’t like that response. Bond yields fell but the curve did not invert once again. Any significant further move down might suggest further economic deceleration to come, but a one- or two-day reaction may just be a sign of the normal ebb and flow of trading.

Earnings season is now starting to wind down and the numbers strongly suggest more of the same. Revenue growth has been fairly anemic. Manufacturing and capital investment has been notably weak. So has the energy sector. Commodity prices in general have been weak, impacting broad swaths of the economy. On the other hand, tech spending has been solid, particularly for software and services. Healthcare has been another strong segment of the economy. But the real hero has been the consumer. And that has been the truth worldwide. Thus, while many economies are struggling to stay out of recession, the commonality has been a strong and buoyant consumer. What has been the negative offset is political uncertainty and tariffs that have slowed the wheels of trade and capital spending.

That is why there has been so much focus on the U.S. trade talks with China. We still want the Chinese to respect intellectual property, halt forced technology transfers and allow U.S. companies greater and easier entrée into Chinese markets. The Chinese want none of the above but might be willing to take baby steps to get some of the tariffs reduced or eliminated. As a sign of peace, they will buy agricultural products in greater quantity if we agree to roll back some or all of the tariffs in place. We don’t want to roll anything back until the Chinese agree to do more than simply buy some more soybeans. Even the small deal agreed to verbally last month isn’t finding its way onto hard copy very easily.

The unknown is President Trump. He can be impetuous and temperamental at times. Even facing an election, that could lead him to lash out and impose more tariffs. He already has a big round of tariffs set to go into effect in December. While most don’t believe that will happen, Mr. Trump relishes in keeping opponents off balance. It wouldn’t be out of character, even with election season approaching, for him to at least threaten to move forward as a negotiating tool to get the Chinese to move in his direction. Markets, of course, don’t want to see any tariffs, including the ones already in force. Any such threat or action would be viewed negatively. What are the odds that Mr. Trump will be more aggressive, at least in the short run? Your guess is as good as mine. Many think they know, but I would suggest that no one really does as Mr. Trump has proven time and again that he is his own boss. All I can say right now is that markets are assuming that the December tariffs are not implemented. The upside is a signed agreement to take them off the table. That is still the most likely outcome. But the odds of some forceful action will increase quickly if talks stop making any progress.

In the meantime, we will get a lot of economic data over the next week of so, and then we enter that mid-quarter vacuum period of little relevant economic or corporate data. That can lead to volatility if some unexpected news occurs. Otherwise, I expect the bond market to lead the stock market. There are no signs of earnings momentum in either direction, which suggests that valuation will depend more on changes in rates over the short term rather than earnings. As noted before, rates are falling in the wake of Wednesday’s FOMC meeting. Two days doesn’t make a trend, but the change in direction bears watching.

Today, Jenny McCarthy is 47. Apple CEO Tim Cook is 59.

James M. Meyer, CFA 610-260-2220

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