The most recent five-day stretch of trading was a highly volatile—and bearish—one, with all of the major U.S. equity indexes suffering their biggest weekly setbacks in quite some time. There was a confluence of factors that raised the nervousness on Wall Street, most notably the recent spike in bond yields. That, along with the uptick in inflation, worries about international trade, geopolitical tensions (the oil market is reacting to the loss of available oil from Iran and bickering between the U.S. and Saudi Arabia), and signs that China is starting to feel the impact of the tariffs from the United States on China’s exports. The world’s second-largest economy recently lower the reserve requirement for China’s banks, a measure often used to stimulate a struggling economy.

As noted, most of the international equity markets witnessed heavy selling last week. In addition to the sharp downturn for U.S. equities—save Friday’s partial rally—the main indexes in Asia and the major European bourses were off sharply. The selling stateside was led by 5.2% decline for the small-cap Russell 2000, with concerns that inflation and rising bond yields will hurt the businesses of the domestically dominated companies weighing on the index. In the NASDAQ Composite (down 3.7% last week), a good deal of the damage was done by the technology stocks. There is a fear that the technology giants will be hurt by the ongoing trade war with China. The Dow Jones Industrial Average (down 4.2% last week), which is comprised of mostly multinational companies, was hurt by international worries. News that the International Monetary Fund has lowered its growth expectations for the global economy raised concerns last week. Likewise, the broader S&P 500 Index posted a setback of 4.1%. The noted worries about inflation and rising bond yields emboldened the bears in a big way, especially with the major averages at or near record highs earlier this month. The CBOE Volatility Index (or VIX), also known as the “fear gauge”, jumped an eye-catching 43.8% over the most recent five-day stretch of trading.

Now, the investment community is gearing up for a heavy dose of earnings news over the next fortnight. The third-quarter reporting season, which many Wall Street pundits expect to be another good one for Corporate America, got off to an encouraging start on Friday, with a number of solid quarterly reports from some U.S. banking giants. The earnings news—and some data on the economy (see below)—seemed to take some of investors’ focus away from inflation and bond yields, which appeared to help the Dow 30, the NASDAQ, and the S&P 500 Index rally 287, 168, and 39, respectively. Of note was better-than-expected September-period earnings from JPMorgan Chase & Company (JPM – Free JPMorgan Stock Report). The nation’s largest bank noted strength in its consumer and community banking business.  The stock, though, finished modestly lower on the day. This week, the onslaught of earnings reports will be led by seven Dow-30 companies, including three tomorrow morning: Goldman Sachs (GS – Free Goldman Sachs Stock Report), UnitedHealth Group (UNH – Free UnitedHealth Stock Report), and Johnson & Johnson (JNJ – Free J&J Stock Report).

We also will get some important news from the business beat. The U.S. economic data have been strong, but maybe too good for the investment community. It has stoked worries that the economy is overheating and may result in some inflation going forward, especially with the tight labor market. This also has raised sentiment that the Federal Reserve—which Fed Chairman Jerome Powell did nothing to quell with his most recent remarks—may be more hawkish than previously expected in 2019, a backdrop that has historically not been good for stocks. A report on consumer prices late in the week that showed lower-than-expected inflation on the consumer side, though, eased concerns a bit, at least for the moment. That seemed to help sentiment for stocks some on Friday. This week we will receive reports on industrial production, housing starts, and building permits. And just moments ago, the Commerce Department reported data on retail sales for the month of September. Specifically, the advance estimates of U.S. retail and food services sales for September 2018, adjusted for seasonal variation and holiday and trading‐day differences, but not for price changes, were $509.0 billion, an increase of 0.1% from the previous month, and 4.7% above the September 2017 figure. Total sales for the third calendar quarter were up 5.9% from the same period a year ago. Still, the tally fell short of the consensus expectation.

With less than a half hour to go before the start of the new trading week stateside, the equity futures are indicating a modest lower opening for the U.S. stock market. However, the undertone right now is suggesting that the selling may pick up as the day progresses. Stocks in Asia and Europe are in the red, with the major European bourses trading at 22-month lows. Geopolitical worries, most notably growing tension between the United States and Saudi Arabia, are unnerving international investors and driving up oil prices. When the U.S. stock market opens, investors may want to keep close tabs on the stocks of industrial companies, which are likely to be under pressure, given their reliance on oil. The financial-services companies on the Continent are weaker too, sentiment that may carry over to the domestic market. Stay tuned.

- William G. Ferguson

 At the time of this article’s writing, the author did not have positions in any of the companies mentioned.