Market Commentary - Week Ending 11/3/2018

Summary

Market Performance Summary

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

Notable Market Headlines

Stocks started the week sharply lower then rallied for three consecutive days before retreating somewhat on Friday. Concerns remain about the likely strength of future corporate sales and earnings growth combined with signs of wage inflation in the employment report and the likelihood that the Federal Reserve will continue raising interest rates.

At the close of the week, U.S. large stocks were higher by +2.5% putting them back into positive territory for the year by +1.9%. The S&P 500, Dow Industrials, and NASDAQ Composite all performed very similar to each other this week. The buying by investors though was not indiscriminant with performance varying widely from one sector to the other as illustrated in the below graph.

Source: S&P Compustat

Although September is the worst performing month of the year (see our Week 39 blog), October seems to elicit more fear in investors due to the Crash of 1929 taking place in October. This year October delivered on those fears with the S&P 500 down -6.8% for the month making it the worst since September 2011. Losses of this magnitude are relatively rare, outside of major bear markets, occurring just 8 times in more than 50 years.

A debate about whether stocks have officially experienced a correction will continue on. At the close on Monday, the low for the week, the S&P 500 was down -10.2%, officially making it a correction. As the accompany graph shows, the NASDAQ and small U.S. stocks also fell into correction territory but the Dow Industrials just missed it with a loss of -9.3%.

Source: S&P Compustat

International markets posted strong gains as well with developed markets moving higher by +3.1% while emerging markets did even better with a rally of +5.6%. A couple of notable emerging markets included China’s up +5.4% and Turkey’s market increasing by +5.8%. Year-to-date international markets are still off meaningfully with developed markets down -9.9% and emerging markets lower by -13.4%.

The non-traditional assets very much lagged behind this week with Commodities suffering a -4.0% loss as the price of oil continued to fall. Gold and real estate were little changed with gold down -0.1% and real estate higher by +0.1%.

Bond prices moved sharply lower this week given the strong economic data and expectations that the Federal Reserve will continue to raise interest rates. At the close of the week bonds were down by -0.9% now off -5.0% for the year.

Stock Highlights

Red Hat (RHT), an open source software company, was the best performing stock in the S&P 500 this week jumping +47.6% following an announcement that IBM (IBM) will acquire the company. This would be one of the biggest tech acquisitions ever in an attempt by IBM to regain some growth momentum. This announcement was not so good for IBM shareholders as the stock was among the worst performers in the S&P 500 falling -7.3% for the week and now down -24.6% year-to-date.

Under Armour (UAA), the sports apparel company, reported strong third quarter results with both sales and earnings topping Wall Street estimates. The news was best from the company’s overseas markets while it continues to struggle with growth in North America. The accompanying graph illustrates the slowing revenue growth during the past few years. This earnings report clearly came as welcomed news for investors with the stock surging +27.7% for the week and now up +64% for the year but still off its 2015 record high by -54%!

Source: S&P Compustat

The news at General Electric (GE) continues to worsen with the company now cutting its quarterly dividend to $0.01 per share from $0.12 in an effort to preserve cash. The dividend is clearly sacred for investors as this was once a company that had raised its dividend year after year for decades at a time. Further adding to the company’s problems was a debt rating downgrade. The stock fell below $10 losing -17.8% for the week and now lower by -46.8% for the year.

Apple (APPL) reported record sales and earnings, both topping Wall Street estimates, for the fourth consecutive quarter but the stock fell sharply. Investors focused on fewer than expected iPhone shipments, the company saying it is no longer going to provide as many details about individual product sales, and the guidance for fourth quarter revenue that’s at the low end of Wall Street expectations. The stock fell more than -7% on the report but closed the week lower by just -4.1%.

As the accompany graph shows, investors have become accustomed to Apple’s stock going consistently higher but it has not been without a couple of major corrections during the past decade.

Source: www.YahooFinance.com

Economic Indicator - Reported

The October employment report came in stronger than expected with the economy adding 250,000 new jobs as compared to the estimate of 190,000 although the prior month was revised lower by 16,000. Showing particular strength were the manufacturing and professional and business services sectors. In spite of more workers returning to the workforce, the unemployment rate held at its 49-year low of 3.7%. Getting the most attention in this report was the increase in hourly earnings year-over-year by +3.1%. There is some expectation that companies are going to have to continue paying more to get workers with the unemployment rate so low.

S&P Corelogic Case-Shiller Housing Price Index came in below forecasts with a gain of just +0.1% for the month following a similar gain the month before. The year-over-year gain slowed to +5.9% arguably due to higher interest rates and mortgage costs. A couple of the strongest markets were Las Vegas and San Francisco, both with double-digit gains, with Seattle coming in third place with gains of +9.6% year-over-year.

Consumer Confidence hit a nearly 2-decade high in October with a reading of 137.9. This is the highest level since September 2000. This strong report was fueled by optimism about the economic and jobs market while there seems to be little concern about the recent stock market volatility.

Economic Indicators – Upcoming

The Producer Price Index (PPI), a measure of wholesale inflation, is forecast to increase by +0.2% in the most recent month following a similar increase the month before.

Consumer Sentiment, measured by the University of Michigan, is expected to remain high but possibly ease from the prior month’s level.

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