Market Commentary - Week Ending 9/1/2018

Summary

Market Performance Summary

Source: S&P Compustat, www.yahoo.com/finance for Commodities

Notable Market Headlines

The U.S. markets rallied to new record highs with technology stocks leading the way. At the close of the week the tech-heavy NASDAQ had gained +2.1%, the Dow Industrials were higher by just +0.7%, and the most broad-based measure of U.S. large stocks, the S&P 500, was higher by +0.9%. Small U.S. stocks continued to show strength gaining +0.8% for the week and are higher by +13.5% in 2018 while large stocks have gained +8.5% for the year.

International stocks had another disappointing week with developed markets overall moving just fractionally higher. Among the developed markets, Eurozone countries were generally the losers with signs of stress in markets that are facing more significant economic challenges including Italy with its stock market down -2.5% for the week and Spain’s losing -1.9%. The two other developed market regions did better with Japan’s market gaining +1.0% and Australia was just fractionally lower at -0.1%.

Markets in certain international emerging countries suffered with Turkey’s hitting fresh new lows down another -7.0% for the week and now lower by -53.5% year-to-date. Latin American markets, such as Brazil’s, have had a rough 2018 but avoided adding to losses this week with a gain of +0.2% resulting in the emerging markets index off just -0.5% for the week.

With U.S. markets hitting fresh new highs it is interesting to note how far away many other markets around the world are from doing the same. As the accompany graph shows many markets are off -30% - 60% or more from their record highs including China down -42% from its 2007 high, Russia down -53% from its 2011 high, and the average Eurozone market off -35% from 2007 highs.

Source: S&P Compustat

Real estate stocks continued to climb from their recent March lows gaining +0.9% for the week and now higher by more than +17% rally in just over 4 months. This rally has been helped by bond yields being most flat during this period which makes the high dividend yields for this sector more attractive.

Commodities climbed higher by +1.2% for the week and are now up +7.1% for the year. Oil’s climb higher to 2018 highs on concerns about supplies is helping drive the overall commodities rally. Gold prices further retreated by -0.6% for the week and has now lost -8.2% of its value in 2018. There simply is no concern about inflation in the economy.

Bonds fell in price for the week and push yields higher. The 10-year U.S. Treasury yield remains well below 3%. If fears persist in some emerging markets, investors could continue to flock to these safe havens and keep yields lower for some time although the Federal Reserve raising rates would put pressure on yields to move higher.

Stock Highlights

The volatility among individual stocks was relatively low this week with the biggest winner among the S&P 500 stocks being Regeneron Pharmaceuticals (REGN) gaining +8.1% on no particular news.

One stock that cannot go without mention and posting gains once again this week was Amazon (AMZN). The stock closed above $2,000 per share for the first time Thursday with a gain on the week of +5.6%. If the stock can rally approximately +2% from current levels it will top $1 trillion in total market value making it only the second stock to reach this milestone just behind Apple (AAPL). Amazon’s stock has doubled in just 15 months, crossing $1,000 for the first time on June 2, 2017, and is up +72.1% so far in 2018.

Electronic Arts (EA), a leading developer of games such as Battlefield, Mass Effect, and Need for Speed, was among the worst performing stocks in the S&P 500 for the week. The company announced a delayed release of its “Battlefield V” to make some final adjustments to the game based on feedback from early player tests. The stock fell -12.1% for the week but, as the accompanying graph shows, the stock has done extremely well during the last 6 years when it hit a low below $11 and is now trading at $113.41.

Source: www.yahoo.com/finance

The news from many traditional retailers has been positive but that wasn’t the case for Dollar Tree (DLTR) in its most recent quarter. The company reported same-store sales slightly below Wall Street expectations as well as posting lower profit margins. Furthermore, new tariffs pose a risk to the company given they import 40%-42% of their merchandise. Investors were disappointed sending the stock down -13.9% for the week.

Economic Indicator - Reported

The S&P Corelogic Case-Shiller Housing Price Index came in below expectations with a gain of just +0.1% in the most recent month. This is a meaningful slowdown given the six consecutive months of +0.5% or better in late 2017 and early 2018. New York City saw one of the biggest monthly declines with prices falling -0.7% while prices in Vegas increased by +1.0%. Year-over-year prices are higher by +6.3% overall with Vegas leading the way with a +13.0% gain followed by Seattle at +12.7%.

Consumer Confidence surged higher in August to a reading of 133.4 versus an estimate of just 127.4. This is the highest level since October 2000 during the dotcom mania. There are multiple components to this report with one being the number of people saying jobs are hard to get dropping sharply. This could be a good sign for the coming week’s employment report. Consumer Sentiment, similar to the Consumer Confidence report, also came in better than expected.

Economic Indicators – Upcoming

The consensus estimate for the closely watched Employment Report is that the economy added another 198,000 during the month of August with estimates ranging from 150,000 to 237,000. The manufacturing sector should be one of multiple bright spots in this report. These further job gains are expected to push the unemployment rate down to 3.8% from its current 3.9%.

Vehicle sales for August are forecast to come in at 16.9 million annually which would be a slight uptick from the prior month’s level. Consumer spending has been strong but vehicle sales have not participated in this strength with sales generally flat in 2018.

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