Three Themes to Watch in Q4 Financial Markets

At a Glance

  • The uncertainty of the trade war keeps it at the top of the most critical events facing markets
  • Bank and tech stocks could tell the story of how U.S. markets end the year

With 75% of 2019 behind us, three clear themes have emerged that could determine the path of markets for the fourth quarter. The following are some key dates to circle on the calendar that will give us a more complete picture.

Trade War, Continued

The recent history of the trade war is littered with broken promises and changed plans. Recent events have added another layer of confusion as rumors of the potential restriction of China’s access to U.S. capital markets have been added to the mix. In other words, the situation remains fluid.

Federal Reserve

The more the trade war intensifies, the more the market will look to the federal reserve to provide some support. The next Fed meeting ends on October 30. According to the CME FedWatch tool, the  market currently believes there is a 86% chance that they lower the Fed Funds rate from 1.75-2% range to 1.5-1.75% range. The following Fed meeting is December 11.  The market believes that after that meeting, there is a 40% chance that the funds rate will be 1.25-1.5% (2 quarter point eases) and a 52% chance that the rate will be 1.5-1.75% range. Regardless of the Fed’s actions at the meeting, the results will give the market a greater feel for the Fed’s path.

Earnings Season

The third most important factor in the fourth quarter will be earnings season. I know some very smart people who think that earnings are the most important thing going forward. I just don’t agree. I’ve heard countless analysts predict a coming earnings recession over the last few years and none have materialized.

I also believe that if earnings turn decisively lower, the Fed will ramp up its response. That being said, earnings season has evolved into two prominent events. The first, chronologically, is bank week and the second and more important is tech week. Goldman Sachs, J.P. Morgan and Morgan Stanley all report earnings on October 15.  Obviously there are other major banks that matter to the macroeconomic picture but the market tends to decide what it thinks early.

Over the last few years, the U.S. stock market has become technology-heavy, making the earnings of the tech behemoths disproportionately important. Amazon (Oct. 24) and Apple (Nov. 7) are the two most important because they blend the technology sector with a picture of the health of the consumer. The other important tech releases are Alphabet (Oct. 28) , Microsoft (Oct. 23), Facebook (Oct. 29) and Netflix (Oct. 16). Surely there are many other earnings that matter, but those are the ones that most help paint the picture of the economic condition.

Honorable Mention

Brexit. You remember Brexit right? It is supposed to culminate on an October 31 deadline. You may have guessed that I do not put a ton of weight on the scheduling of Brexit decisions as they seem to be continually pushed further and further away. But we should always remember that at some point, Brexit could move beyond being a distant vision and become very real very quickly. I just don’t have confidence that it’s going to happen soon.

Jim Iuorio is managing director of TJM Institutional Services and a veteran futures and options trader. Jim has spent his career brokering futures and options trades for large institutional clients in equity indexes, interest rate products, commodities and foreign exchange. His recommendations to clients blend macro-economic themes with technical analysis.

Additional Recent Articles in News