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Is the Economy Stupid?

The next several days could be pivotal in determining the intermediate direction of the markets given the multitude of high profile events.

Last night Apple’s earnings were posted.  Initial interpretations were negative with shares at the time of this writing down about 7%.  Will views change or intensify during the day?

At 8:30 September’s BLS labor report is released.  Will the data confirm three elements that underpin the robust nature of the labor market and the economy defined as solid job creation after netting out the competing effect of Hurricanes Florence and Michael, a pace of employment expansion that still exceeds the historical levels for so late in an economic cycle and third a pickup in wage growth.

The data could significantly influence the outcome of the November’s and December’s Fed meeting.  I must write few are expecting any changes at the November 8 meeting but it is the tone of the meeting that is of significance.  Some are suggesting that starting in 2019 the Fed cease giving forward guidance about rate intentions, the intents of such may be telegraphed next week.

Regarding job creation, similar to past reports, the labor participation rate will be of considerable interest.

And then there are wages.  September’s wages rose by 3.0%, up from 2.8% in August.

I do think it is significant third quarter productivity increased by 20% greater than analysts’ had expected and the increase in productivity during the past two quarters is the greatest since 2015.  Increased productivity is pivotal to wage growth and economic creation.

And then there is the election which is perhaps the most significant and widely followed midterm in a generation with turnout expecting to eclipse 1966’s record.   As greatly discussed there are only two times over the last 21 midterm elections the party of the incumbent president gains seats in Congress…1934 and 2002.  Historically the party of the incumbent president loses 30 seats in the House and 4 seats in the Senate.

This strong precedence coupled with the perceived anathema towards the President augurs well for the Democrats.

However, if 2018’s midterms become the third such occurrence of the President’s party maintaining seats, James Carville’s 1992 slogan for Candidate Clinton It is the economy stupid will take upon even greater significance.  Annual economic growth is the greatest in over a decade.  As Carville articulately stated 26 years ago voters vote their pocket books.

The last event I would like to discuss is next week’s G-20 meeting.  Will China and the US resolve any trade issues?  Depending upon the source, the expectations are either low or high given various interpretations of the President’s negotiating tactics.

Speaking of which, equites advanced yesterday following Trump’s tweet claiming progress in trade negotiations with China.

Last night the foreign markets were up.  London was up 0.74%, Paris up 1.28% and Frankfurt up 1.45%.  China was up 2.70%,  Japan up 2.56%  and Hang Sang up 4.21%.

The Dow should open considerably higher on trade optimism but this could change given the significance of the 8:30 data.  The 10-year is off 8/32 to yield 3.17%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.