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U.S. stocks fall as trade uncertainty dampens a banner week for Wall Street

U.S. markets wavered Thursday as renewed trade uncertainty rattled investors, threatening to derail a week of record-breaking gains fueled by strong earnings. (Brendan Mcdermid/Reuters)

October salvaged its reputation as one of the most troubling months for investors. All three major U.S. stock indexes slid on Thursday, the last day of the month. The declines derailed a week of record-breaking gains powered by unexpectedly strong earnings and yet another interest rate cut, courtesy of the Federal Reserve.

The Dow Jones industrial average on Thursday closed down 140 points, or 0.52 percent, eking out a 0.48 percent October gain. The Dow is up 16 percent this year. The Standard & Poor’s 500 index, which clocked new all-time highs earlier in the week, shed nine points, or 0.30 percent Thursday. The broad market finished October up 2 percent, according to Howard Silverblatt of S&P Dow Jones Indices. The S&P is up more than 21 percent on the year. The tech-laden Nasdaq Composite barely moved, with a 0.14 percent decline. The Nasdaq was up a respectable 3.66 percent on the month.

Thursday’s declines originated from several trouble spots. Bloomberg News reported Chinese officials are trying to lower expectations for a comprehensive trade deal because of worries President Trump could still upend negotiations; they’ve also signaled they won’t yield on the toughest issues that remain.

The report comes one day after Chile called off the Asia-Pacific Economic Cooperation forum Nov. 15-17 in Santiago, where Trump was scheduled to meet with China’s president, Xi Jinping, to lock down “phase one” of the trade agreement. White House spokesman Hogan Gidley said Trump still intends to finalize a deal in mid-November.

On Thursday morning, Trump tweeted that a new location for the summit would be announced shortly.

Ed Moya, an analyst with OANDA, said in a research note Thursday that “future negotiations are likely to see an uphill battle that will depend more on the strength of the U.S. economy. Moya noted that a big part of the economy, business investment, is struggling, and that category “will not get any favors if Trump decides to ramp up the trade war.”

A key measure of factory activity in the Midwest known as the Chicago Purchasing Management Index released on Thursday hit its lowest level in four years, showing a strain on manufacturing.

The Shanghai Composite index closed down 0.4 percent Thursday as fresh data indicated Chinese manufacturing had fallen to an eight-month low in October, in yet another sign that the trade war is hampering the world’s most powerful economic engines.

The Commerce Department announced Wednesday that the economy grew at a 1.9 percent annualized pace this quarter, far short of the 3 percent the White House promised would arise from the 2017 tax cut. Hours later, the Federal Reserve cut interest rates by a quarter percentage point in an effort to spur more growth. But central bank leaders also hinted further cuts might not be coming anytime soon, despite pressure from Trump to do more.

“Without explicitly stating, the Fed appears to be on hold from cutting rates further in the near term as some of the downside risks that provoked the series of rate cuts look to be somewhat contained,” Charlie Ripley, senior investment strategist for Allianz Investment Management, said in a statement emailed to The Washington Post.

Economy slows, Fed hits brakes, and uncertainty clouds Washington's next steps

The Fed’s “hold” on future rate cuts may have been partly responsible for some of Thursday’s reversal, according to analysts.

“The Fed did its third cut of the year yesterday, and today’s stock market reaction might be due to the fact that that’s all the good news the Fed will deliver for a while,” said Ed Yardeni, president of Yardeni Research.

The busiest week of the earnings season had propelled the S&P 500 index to all-time highs on Monday and Wednesday, assuaging investor fears that the slowing economy had taken a bite out of corporate profits.

Many big companies, including Microsoft, Intel, Facebook and Pfizer have easily beaten earnings estimates and raised guidance going forward.

“October has been pretty good, considering that the month has a reputation for some pretty nasty sell-offs,” Yardeni said.

Of the 339 companies reporting earnings as of Thursday, 75 percent have beaten estimates. That’s well above the 67 percent historical norm, according to Silverblatt.

“We came into earnings season with guesstimates that earnings would be down 4 percent from last year,” said Jeffrey Saut of Capital Wealth Planning. “Earnings this quarter will be flat, at best, to up a smidgen.”

Analysts said earnings may have bottomed out, and they expect upward growth from here.

“The economy is doing reasonably well,” Yardeni said. “Companies are seeing revenue growth. That’s translating into earnings growth.”

Saut said he sees almost no chance of a recession the rest of 2019 and into 2020. Bespoke Investment Group said less than 12 percent of companies reporting so far have lowered guidance on earnings.

Markets may still be shaking a bit as they head toward the last two months of the year, especially after the hazardous ride in the fourth quarter of 2018. Stocks crashed this time last year, sending returns into negative territory for the entire year. Instinet Executive Director Frank Cappelleri said another fourth-quarter drop is unlikely in 2019, because back-to-back years of fourth-quarter stock market losses are relatively rare.

“We have not had two, consecutive fourth-quarter losses since 2007 and 2008,” Cappelleri said.