Weekend Market Brief – Sunday 10/21/18

Next week approximately 150 S&P 500 companies are expected to announce their third-quarter earnings. Forward earnings guidance hasn’t been overly bullish, with fourth-quarter earnings expected to see a sharp deceleration as the global economy slows down.

Also next week the U.S. Treasury will auction off $276 billion of debt, which is believed to be the largest weekly bond auction in U.S. history. When the government borrows, it borrows from the wealth generators of the world – those who have U.S. dollars. Government borrowing also has the effect of draining liquidity from the financial system that might otherwise be used to buy equities.

The recent slowdown in economic activity may be partially attributed to the large government deficits. This is also perhaps why President Trump asked his cabinet to reduce their budgets by 5% or more, as someone probably told him the recent weakness in the stock market is due to how much borrowing we are doing.

Many analysts are indicating corporate share buybacks will be coming back online in the weeks to come and this will cause stock prices to rise. Remember, when a corporation buys their stock back, they are just transferring money to the seller. No new money is created. With market liquidity at very low levels and the money supply resuming its deceleration into the “danger zone,” stock prices may continue falling just like they did in late 2007 when corporations were massively buying their stock back.