Stock Market Remains Choppy as Investors Mull Q3 Earnings and Partial U.S./China Trade Pact

Why Is the Stock Market So Choppy?

Stocks ended the third quarter on a bullish note but started the fourth quarter in the red. North American stocks are starting the fourth quarter of the year in a choppy, see-saw fashion as uncertainty around third quarter earnings set in and questions linger over the partial U.S./China trade pact. It’s becoming more and more apparent that the stock market will remain volatile over the coming weeks as economic data from Canada and the U.S. takes center stage.

Will the New U.S./China Agreement End the Trade War?

On Friday, October 11, the U.S. and China announced they had reached a partial trade deal that will, analysts hope, lead to a more concrete, long-term agreement. It couldn’t come at a better time. The trade war between the world’s two largest economies is being blamed for the global economic slowdown.

Domestically, China and the U.S. are also gunning for a resolution for the trade war. China’s economy is under serious pressure, with gross domestic product (GDP) falling and consumer sales flat. In the U.S., President Trump is busy dealing with an impeachment inquiry. He also doesn’t want to go into an election year with the economy sliding into recession.

Despite the self-congratulatory hype coming from both sides, there is growing doubt about the scope and feasibility of the deal. Beijing and Washington still need to finalize the terms; and the actual terms don’t really address most of President Trump’s biggest concerns. Moreover, we’ve been down this road before, with supposed agreements leading nowhere.

The partial U.S./China trade deal might be being touted as a victory but too many doubts remain.

Is Industrial Sector Key to Saving Third Quarter Earnings Season?

Earnings season is the best way for investors to see what kind of shape the economy is in as the fallout from trade tensions between the U.S. and China makes its way through corporate America.

Investors should focus their attention on the industrial sector for signs of the health of the overall economy. The industrial sector only makes up around 10% of the S&P 500, but it provides a clear snapshot of the overall economy. The industrial sector includes big multi-national manufacturers as well as transportation companies.

The broader market may be near record levels, but industrials is 5% below its record 2018 levels. Moreover, economic data is painting a weak picture. In September, U.S. manufacturing activity fell to a 10-year low as industrial companies felt the brunt of the lingering trade war between the U.S. and China.¹

Financial results from some of the biggest industrial companies will be released over the coming weeks, including Honeywell International Inc (NYSE:HON), Union Pacific Corp (NYSE:UNP), United Airlines Holdings Inc (NASDAQ:UAL), and Finning International Inc (TSE:FTT).

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North American stocks are at record levels, but that rally is in jeopardy as Bay Street and Wall Street digests the merits of the partial trade deal inked between the U.S. and China. How the trade war has impacted earnings and the Canadian and U.S. economies will also soon become apparent. As a result, investors should probably get used to the stock market see-sawing back and forth. That doesn’t mean they should avoid stocks though.

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Photo Credit: iStock.com/scyther5