Week Ending 10/21/2017

Summary

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

Notable Market Headlines

U.S. stocks rallied to another all-time record high with large U.S. stocks gaining +0.8% while small U.S. stocks were higher by +0.4%. The Dow Jones Industrial Average surged through 23,000 and is now higher by more than 3,500 points this year. Leading the markets higher were healthcare stocks as some industry leaders posted strong earning but a cloud still remains over this sector given the political uncertainty.

International stocks were lower with developed country stocks down -0.3%. One developed market being watched closely by Investors is Spain as the country deals with a political crisis of one of its 17 regions pushing for secession. In spite of this unfolding story, Spain’s stock market was down only -0.7% for the week and is higher by +24.8% year-to-date which is better than the average developed country market.

International emerging market were also lower, down -0.9%. Contributing meaningfully to this loss was Brazil’s market down -2.5% as the country grapples with a president accused of corruption and popularity among zero. In spite of this week’s loss and this ongoing political issue, Brazil’s market is still higher year-to-date by +26.8%.

Non-traditional assets did not help a diversified portfolio this week with losses across the board. Real estate stocks fell -1.6% for the week, back into negative territory for the year, following a gain of nearly the same size the week before. Gold was down -1.8% but is still higher by +10.9% for the year. Commodities were down just fractionally and are still the worst performer year-to-date with a loss of -4.2%.

Bonds were down -0.4% for the week following a rally the prior week of nearly an equal amount. A higher likelihood of a tax deal in Washington that could cut taxes meaningfully could be putting downward pressure on bond prices out of fear that more bonds will need to be sold in the future to finance more deficits.

U.S. Stock Market History

Thursday of this week marked the 30-year anniversary of the stock market crash of 1987. October 19, 1987 was the biggest 1-day decline in the Dow Industrials with a loss of -22.6%! Some investors may have thought the crash in October 1929 was bigger, and it was, but it occurred over two days for a total decline of -23.1%.

The crashes of 1929 and 1987 were similar to each other in a few ways.As the accompanying graph shows, in both cases stock prices peaked about 2 months prior the crash and had already fallen about -20% before the crash. Two days following both market crashes, the market bounced back with strong rallies with gains in the upper teens.

Source: Patton Funds’ research

There is one enormous difference between these two crashes. Following the crash of 1987 stocks bounced around for about 6 weeks but the day of the crash was the low for the market. On the contrary, in 1929 the crash was just the beginning of a very long bear market that resulting in stock prices ultimately falling by -89% in 1932.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

General Electric (GE), the only stock that has been in the Dow Jones Industrial Average since its inception in the late 1800’s, reported earnings of $0.22 per share on revenue of $33.5 billion. This report was initially viewed very negatively be investors with its stock falling more than 8% but then closed the day higher by 1% (a more than $16 billion value change during one trading day!). The company has been struggling for many years and its stock has dramatically lagged behind the market as the accompanying graph shows. There is some optimism given the company’s new CEO in the last 90 days.

Source: www.yahoo.com/finance

Grainger Inc. (GWW), a distributor of parts to the manufacturing industry, reported better than expected earnings for the quarter and its stocks surged +14.8% for the week. In spite of this gain, the stock remains lower for the year by -10.5%. The company has been feeling competitive pressure from Amazon as Amazon continues to expand its business into Grainger’s markets.

Adobe Systems (ADBE) stock surged to a new record high gaining +14.1% for the week and now higher by +70.6% year-to-date. This software company, known by nearly all computer users for its Acrobat (pdf) software, indicated that its business is performing better than original expected and sales and earnings should be above earlier guidance. By the end of 2018, earnings per share should hit $5.50 or 134% higher than in 2016.

Several healthcare stocks were on the move higher for the week making it the best performing sector. Some of the winners included United Healthcare (UNH) and HCA Healthcare (HCA), up +6.9% and +8.7% respectively. A strong earnings report from United Healthcare, the biggest company in the industry, as well as general optimism by investors about the political environment for this industry helped these stocks this week.

International Business Machines (IBM), better known as IBM to most people, reported quarterly results that were better than expected. Its stock reacted well with it higher by +10.2% for the week but remains down in 2017 by -2.4%. This company has been struggling for several years to adapt to the changing technology industry. As illustrated in the accompanying graph, IBM’s revenue has been falling for multiple years but the decline does appear to be slowing. Unfortunately for investors it has been a disappointment with its stock price below levels 5 years ago while the rest of the market has moved meaningfully higher.

Source: S&P Compustat

Economic Indicator - Reported

Housing starts for September were well below economists’ estimates and down -4.7% as compared to the prior month. The report showed declines in both single family and multi-family (example: apartments), down -4-6% and -5.1% respectively. Regional data shows there could be some hurricane effects in the South region but there was also significant weakness in the Midwest and Northeast as well.

Existing home sales came in better than expected at an annual rate of 5.39 million annually. This was the first increase in 4 months. Sales in Florida were down sharply due to the hurricane impact but Houston’s numbers have already recovered. The overall strong in sales did come at a cost with the median price falling -3.2% for the month but remains higher year-over-year by +4.2%.

Industrial Production, a measure of output in the manufacturing, mining, and utilities sectors, came in better than expected for September at +0.3%. The manufacturing sector, one component of this overall report, disappointed with a gain of just +0.1% as compared to the estimate of +0.4%. This disappointing September report was accompanied by overall downward revisions to the prior two months numbers as well.

Economic Indicators – Upcoming

Durable Goods Orders for September are expected to rise +1.0% following a very strong August report of +2.0%. It is expected that vehicle replacements due to the hurricanes will be a positive factor in September but, even when excluding transportation, the number is still expected higher by +0.5%.

We will get the first read on third quarter Gross Domestic Product (GDP), a measure of the country’s total value of production, with the estimate at +2.5%. This would be a relatively strong quarter but slower than the second quarter growth of +3.1%.

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