Market Commentary - Week Ending 9/29/2018

Summary

Market Performance Summary

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

Notable Market Headlines

Stocks were lower around the world though no region experienced significant declines. Investors were faced with $200 billion of tariffs in the U.S. going into effect on Chinese goods. Furthermore, the Federal Reserve raised interest rates by 0.25% as was widely expected. The Fed signaled intentions to raise rates one more time in 2018 and then three more times next year. These higher rates are expected to put downward pressure on stock prices as bonds of higher yields becoming more attractive to investors.

At the close of the week U.S. large stocks were lower by -0.4% as measured by the S&P 500. In the prior week the Dow Industrials performed meaningfully better than the S&P 500 but that was not the case this week with the Dow falling -1.1%. The tech-heavy NASDAQ actually posted a gain for the week of +0.7% driven by technology stocks being the best performing sector for the week. U.S. small stocks delivered a second consecutive week of underperformance down -1.1% for the week but are still holding onto some of the best year-to-date gains of +10.6% as compared to large U.S. stocks higher by +8.9%.

The close of this week also marked the close for the month of September. For the month U.S. large stocks, again as measured by the S&P 500, were essentially unchanged. This compares to an average loss, going back 55 years, of -0.2% during the month of September which, as the accompany graph illustrates, is the worst performing month on average.

Source: Standard & Poor’s; Patton analysis

Many investors tend to believe stocks perform poorly in October due both the crash of 1929 and 1987 occurring in October. That’s not the case though as October actually tends to be one of the better performing months followed by both November and December which provides some optimism for the remainder of the year.

International stocks were lower across the board with developed markets falling -0.9%. Among the developed market regions, the Eurozone was the worst performing with a loss of -2.3% fueled by Spain’s market off -4.0%, Italy’s down -4.9%, and Germany’s lower by -2.7%. One region in positive territory was Japan gaining +0.3% for the week.

Emerging markets also fell for the week down -0.7%. The surprising winner was Turkey’s market with a gain of +6.2%. In spite of this gain that market remains lower by -45.2% for the year but it has rebounded +24.9% from its lowest point about 6 weeks ago.

The price of oil has moved higher for 5 consecutive quarters nearing 4-year highs this week as oil producers agreed not to raise output immediately and exports from Iran a slowing due to economic sanctions. At the close of the week Brent Crude was at $82.95 per barrel resulting in the overall price of commodities higher by +2.7% for the week.

The Fed’s hike in interest rates puts downward pressure on gold, real estate, and bonds. Both gold and real estate decline for the week down -0.6% and -2.6% respectively. Bonds did inch higher by +0.1% for the week as investors may have been looking for some safety with stocks generally declining.

Stock Highlights

Tesla (TSLA), the electric car company, is not an S&P 500 stock but one generating multiple headlines this week. It’s popular founder and CEO, Elon Musk, faced a Securities and Exchange Commission (SEC) lawsuit related to tweets Musk made a couple of months ago about taking the company private. The SEC alleged Musk had no meaningful basis for making such statements. On Saturday the SEC and Musk settled the matter with Musk having to step down as Chairman of the company but will remain as its CEO. Tesla’s stock was down -11.5% for the week to its lowest level since early 2017.

Abiomed (ABMD), a medical devices business focused on solutions for the failing heart, was the biggest winner among the 500 stocks in the S&P 500 this week. The company reported some positive results related to one of its products driving the stock higher by +16.9% for the week. It is now higher by +140% for the year adding to its gains of the past 5 years, as illustrated in the accompanying graph, of +2,260%!

Source: www.YahooFinance.com

Alexion Pharmaceuticals (ALXN), a developer of various therapeutic products, announced an a $1.2 billion acquisition of the biotech company Syntimmune. This follows another acquisition in April of a Swedish company for $855 million. Investors reacted well to this week’s news pushing the stock higher by +14.0%. This stock had a tremendous run from the mid-2000’s peaking about 4 years ago and remains off the high by -28.7%.

Conagra (CAG), the giant food company, reported disappointing quarterly results with both sales and earnings per share below Wall Street estimates. The company went on to provide weak guidance for the upcoming quarters. None of this was received well by investors with the stock falling -9.3% for the week and now off -17.6% from its high set in early 2017.

Economic Indicator - Reported

New home sales for August came in almost exactly as forecast as 630,000 units annually but the prior two month’s reports were revised lower by 39,000. Prices have been rising slower than sales as builders discount prices to move inventory.

The S&P Corelogic Case-Shiller Housing report also showed signs of housing prices decelerating. In the most recent month prices were higher by just +0.1% and the year-over-year rate fell to +5.9% from +6.4% in the prior month. Of particular note is New York City prices down -0.5% making this the fourth consecutive monthly decline.

Consumer Confidence, reported by the Conference Board, came in well above economists’ expectations at an 18-year high. A couple of notes of weakness included the number of people saying jobs are hard to get increased by 1.1% as well as those seeing their income rising over the next six months falling by -2.8%.

Economic Indicators – Upcoming

The September employment report is expected to show the economy adding 180,000 new jobs which would be down from 201,000 in the prior month. The unemployment rate is expected to fall by -0.1% to 3.8%.

Factory orders are expected to have been strong gaining +2.0% in the most recent month.

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