Market Commentary - Week Ending 9/22/2018

Summary

Market Performance Summary

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

Notable Market Headlines

Stocks rallied around the world with international markets surging higher in the face of an escalating trade war and rising interest rates. Interest rates are not only rising in the U.S. but are in many areas around the world as well which historically has created some headwinds for stocks as bonds become a more attractive investment alternative.

In the U.S. stocks were mixed with large stocks higher by +0.9% as measured by the S&P 500. The Dow Jones Industrials, an index of 30 stocks, far outperformed the S&P 500 with a gain on the week of +2.3% setting a new record high. The tech-heavy NASDAQ lagged well behind posting a loss of -0.3%. Year-to-date the NASDAQ remains at the front of the pack with a gain of +15.7% while the S&P 500 is up +9.6% and the Dow is higher by +8.2%.

Small U.S. stocks did not participant in the week’s gains losing -0.5% for the week. These stocks have been seen as a safe haven in the face of a trade war as smaller companies tend to have a larger portion of their revenue come from domestic markets resulting in international concerns having less impact.

The week’s performance, with the S&P and Dow higher while the NASDAQ and small stocks were lower, was unusual relative to the performance so far in 2018. The accompanying graph shows the performance of these four indexes since the start of the year with the NASDAQ clearly leading followed by small U.S. stocks.

Source: www.YahooFinance.com; Small U.S. Stocks represented by IWM.

International stocks were the week’s winners with both developed and emerging markets surging higher. The biggest winners this week tended to be markets that have been weakest year-to-date. Overall developed markets gained +2.8% while emerging markets were higher by +3.0%. In the developed world Spain and Italy’s markets were the bigger winner but still remain lower for the year. Of the emerging markets, the biggest, China, rallied +4.6% but the biggest winner was Brazil surging +8.0%. In spite of these big gains for the week, China’s market is still lower year-to-date by -6.6% and Brazil is down -16.5%.

The alternative assets classes lagged behind the surging stock markets. Real estate, possibly feeling the pressure of higher interest rates, was lower by -0.1%. Gold gained +0.4% possibly on the prospects of a little inflation and commodities gained +2.0% on a move higher in oil prices.

Bonds were weak, down -0.2%, with the benchmark 10-year U.S. Treasury yield topping 3.0% once again. This yield broke through 3% in late April and into May but then retreated. We’ll see if it holds this time.

Stock Highlights

Six of the top ten performing stocks in the S&P 500 were financials as noted in the accompanying table. Higher yields on bonds were pointed to as one reason for this strength as earnings can be boosted due to a wider spread between what they pay customers and what they make owning bonds. In spite of the week’s rally, many of these stocks remain sharply lower for the year.

Source: S&P Compustat

Red Hat Inc. (RHT), an open source software company including products such as Linux, reported quarterly results with sales growth coming in below expectations due to currency impacts. Growth in quarterly sales has fallen sharply during the past few quarters and is rattling the confidence of investors. At the close of the week the stock was down -9.6% and is off -23% since its June peak but remains higher year-to-date by +12.1%.

Nordstrom (JWN), a high-end fashion retailer operating approximately 370 stocks, saw its stock retreat from its recent highs. August was a good month for the company and stock with the company experiencing solid same-store sales numbers and an optimistic outlook for the remainder of the year driving the stock sharply higher. This week was one with the stock simply giving back some of those gains lowing -7.9% for the week but still higher by an impressive +27.4% year-to-date.

General Mills (GIS), a major manufacturer and marketer of consumer foods worldwide, reported disappointing quarterly results with earnings below forecast while sales did grow but also missed analysts’ growth expectations. The growth in sales is welcomed given the difficult long-term sales trends as illustrated in the below graph. The stock reacted negatively to this news, adding to the year’s loss with it down -6.9% for the week and now -25.0% year-to-date.

Source: S&P Compustat

Economic Indicator - Reported

Housing starts came in stronger than expected at 1.282 million units annually compared to an estimate of 1.240 million. This August report represented a gain of +9.2% from the prior month. Multi-family starts drove the month’s gains up +29.0% as compared to single family starts up just +1.9%. Year-over-year multi-family starts are sharply higher while single-family starts are slightly lower. Permits were lower for both multi and single-family which does not bode well for future starts.

Existing home sales were flat month-to-month in August coming in at 5.34 million units which was slightly below estimates. This was welcomed news following four consecutive months of declines. Numbers were significantly different from the various regions around the country with sales in the west down -5.9% while higher by +7.6% in the northeast.

The Leading Indicators report, a composite of 10 forward-looking economic indicators, posted a solid gain of +0.4% but was slightly below forecasts. Orders in the manufacturing sector help drive this strong report.

Economic Indicators – Upcoming

We will get another report on the housing market with New Home Sales expected to show a small gain over the prior month at 630,000 units annualized. Furthermore, the S&P Corelogic Case-Shiller Housing Price Index will be reported with the consensus expecting a small gain of +0.1%. This would represent a meaningful slowdown as compared to prior months.

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