Market Commentary - Week Ending 11/17/2018

Summary

Market Performance Summary

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

Notable Market Headlines

It was a rough week for investors with stocks, and nearly all investments, moving lower. Concerns are mounting that the global economy is slowing combined with expectations of continued increases in interest rates making everything more expensive.

At the close of the week large U.S. stocks, as measured by the S&P 500, were down -3.8%. The Dow Jones Industrials fell -4.4% while the tech-heavy NASDAQ was down a similar -4.3%. Energy stocks, such as Exxon Mobile (XOM) and Chevron (CVX), were among the hardest hit with the sector down -5.1%. This was not the worst performing sector as the selling in technology stocks picked up some momentum with the sector falling -5.5% for the week and now off -16.5% from the August highs.

International stocks weathered the week’s downward pressure somewhat better with developed country stocks down -1.9%. Markets in France and Germany were both down more than -2.5% while the U.K. market held up relatively well, down just -1.4%, in spite of many headlines about its deal with the EUInternational emerging markets fell with the rest of the world’s markets down -2.8% and are now lower by -15.7% for 2018. Markets in Brazil and Mexico were some of the poorer performers.

Since the Brexit vote in June 2016, U.K. stocks have underperformed both European Union and U.S. markets as the below graph shows. The difference though between EU stocks and the U.K. is less than 10% during this more than 2 years since the vote suggesting the vote has not been a catastrophe as some market watchers suggested it could be.

Source:www.YahooFinance.com

Oil hit fresh new lows this week closing at $50.39 a barrel. The steep drop this week included a -7.76% decline on Friday along. Concerns about too much supply as well as a slowing global economy are being pointed to for the price drop. This decline in oil prices pushed the commodity index lower by -6.2% for the week.

Gold prices held steady, up +0.1% for the week, as stocks fell. This is the second consecutive week that gold has help mitigate some of the losses in a well-diversified portfolio. Real estate also held up relatively well for the week falling just -0.9%. After lagging behind large U.S. stocks for most of the year, and sometimes by a wide margin, year-to-date real estate is now slightly ahead of U.S. large and small stocks.

Bonds closed the week unchanged. This is a bit of surprise for some market observers given the sharp drop in stock prices that is often accompanied by investors buying bonds and pushing prices higher. The yield on the 10-year U.S. Treasury remains just slightly above the key 3% level.

Stock Highlights

In September 2017, United Technologies (UTX) announced a $23 billion takeover of Rockwell Collins (COL), a worldwide aviation equipment company. The deal was approved by the U.S. about a month after the announcement but was just approved by Chinese regulators this week. Investors had begun to wonder if the trade tensions between the U.S. and China would ultimately kill this deal. Rockwell Collins stock jumped +6.9% for the week on the approval making it the best performing stock in the S&P 500.

Homebuilding stocks bucked the week’s downward trend as many of the market’s most beaten up stocks rallied. Lennar (LEN), Pultegroup (PHM), and D.R. Horton (DHI) each gained +3% or more for the week but remain sharply lower for the year as the accompany graph illustrates. The news for homebuilders is rough with sales and stars slowing, builder confidence falling, and mortgage rates rising. Clearly there are some investors hoping these stocks have seen the bottom given the sharp price declines.

Source: S&P Compustat

American Airlines (AAL), United Continental (UAL), and Delta (DAL) were among the better performing stocks in the S&P 500 as the price of oil plummeted. Oil prices had been trending higher in 2018 resulting in airline fuel expenses increasing by 30% or more in the most recent quarter. The recent drop in oil prices should help improve profit margins in the coming quarters.

Many retail stocks had a very tough week with Target (TGT) being one of the worst. This big-box retailer reported quarterly earnings that fell short of Wall Street estimates but with higher than expected revenue. The company’s investments in the future, such as its same-day delivery service to compete with Amazon (AMZN), weighed on current profit margins. Despite the quarterly earnings miss the company maintained its full year guidance but investors were not impressed. Target’s stock fell -15.5% for the week. Other retailers such as Ross Stores (ROST), Kohl’s (KSS), and L Brands (LB) were all also down -12% or more for the week. Optimists are hopeful Black Friday’s news will be good and help boost these stocks to close out November.

Apple (AAPL) was once one of the better performing stocks for the year but is now just marginally higher. After peaking on October 3rd at $232.07 with a market value in excess of $1.1 trillion, the stock has fallen -25.8% which includes this week’s drop of -11.0%. A drop of this magnitude is not entirely uncommon for this stock as highlighted in our Week 44 blog.There have been a wide variety of stories surrounding Apple but the overarching theme is the expectations of slower growth as illustrated in the accompanying graph of quarterly sales growth.

Source: S&P Compustat; Estimate: https://www.mercurynews.com/2018/11/01/apples-revenue-up-sales-outlook-down-are-high-priced-iphones-a-factor/

Economic Indicator - Reported

Housing starts came in a 1.228 million, just shy of estimates, which was up 1.5% from the prior month but -2.9% below a year ago. Permits for the month were -0.6% below the prior month and -6.0% below a year ago. Higher interest rates are being blamed for the slowdown.

Existing home sales rose for the first time in 6 months increasing +1.4% over the prior month to an annualized rate of 5.22 million. The Western region of the country exhibited the most strength with a +2.8% jump followed by the South at +1.9% while the Midwest was the only region declining. This is good news but the longer term trend, consistent with the overall housing market, is down with existing home sales -5.1% below a year ago.

Durable Goods Orders, orders for items generally lasting 5 or more years, fell by -4.4%, more than expected, due to declines in volatile airplane orders. Stripping out both airplanes and autos, orders actually rose for the month by +0.1%. Some economists are optimistic spending will increase as companies need to buy equipment to help make operations more efficient while others are concerned the slowing global economy will hinder spending. Time will tell.

Consumer sentiment dipped to a reading of 97.5 from 98.6 in the most recent month. This is the second consecutive decline but remains near 10-year highs.

Economic Indicators – Upcoming

The report on third quarter Gross Domestic Product (GDP) will be the most closely watched report of the week with expectations that growth slowed as compared to the first half of the year. Other economic data will include the Case-Shiller Housing Price Index and Consumer Confidence report.

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