Market Commentary - Week Ending 12/1/2018

Summary

Market Performance Summary

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

Notable Market Headlines

Comments from Federal Reserve Chairman Powell sparked a sharp mid-week rally. In his speech at the Economic Club of New York he said that interest rates are now just below neutral which is different than he indicated just two months ago when he said rates were a long way from neutral. It has been believed that investors had become fearful that the Fed would continue hiking interest rates in spite of what may be a slowing economy. In addition to Powell’s comments, some hopes that President Trump will make progress on a trade deal with China also boosted investor optimism.

At the close of the week U.S. large stocks, as measured by the S&P 500, were higher by +4.7% while the Dow Industrials gained +5.2% and the tech-heavy NASDAQ jumped +5.6%. Small U.S. stocks also performed well but lagged behind by a considerable margin gaining +3.2%. Year-to-date both large and small U.S. stocks have moved back into positive territory with gains of +3.3% and +0.1% respectively.

International stocks rallied this week as well but not by the same magnitude as we saw in the U.S. Developed country markets gained just +1.6% with Japanese stocks performing the best of the three major regions higher by +2.3%. A notable laggard was the U.K. market up just +0.5% as the country continues to grapple with its exit from the EU.

Emerging international markets performed better the developed markets with a gain of +3.4%. China’s market was among the best performing of the group higher by +4.2% but still lower year-to-date by -9.0%. Indian was another standout winner gaining +4.4%. It’s growing economy, like nearly all others, is dependent on oil and falling prices are expected to be a positive for continued growth.

The recent strength in real estate stocks continued this week gaining +2.6% and are once again positive for the year by +1.8%. Commodity prices slipped by -0.2% which was relatively welcomed news for investors as prices have fallen -19.3% since early October. Gold also fell by -0.2% as investors continue to show no signs of fear regarding inflation.

Bond prices inched higher by +0.2% for the week pushing yields lower. The yield on 10-year U.S. Treasury Bonds closed below 3% at 2.993% on Friday. The Fed Chairman’s comments the interest rates are near neutral were clearly the catalyst for these falling rates and higher bond prices.

Stock Highlights

458 of the 500 S&P 500 stocks were higher this week making it not only a good week but one that benefited many stocks. In spite of this widespread strength, the average stocks is down -15.9% from its high while the S&P 500 index is down just -6.2%. This discrepancy is due to the largest stocks in the S&P 500 holding up better than the smaller companies.

The best performing stocks for the week was Salesforce.com (CRM), an enterprise software company focused on customer relationship management. The company reported better than expected quarterly results with sales reaching $3.39 billion, up +26% from the prior year, and earnings per share of $0.61. CEO Mark Benioff told CNBC that he thinks the company has never been in a better position as companies continue to embrace cloud computing. Salesforce’s stock jumped +17.0% for the week and now +39.6% for the year but remains well below its recent high. As the accompanying graph shows, this stock has been an incredible performer.

Source: www.yahoo.com/finance

Amazon (AMZN) was among the best performing stocks this week gaining +12.5% or +$92 billion in market value! The company reported record sales over the five days of shopping from Thanksgiving through Cyber Monday. The company’s Echo Dot was its biggest seller followed by other products including its Fire TV Stick and Fire 7 Tablet. The company’s 5-day re:Invent conference, with 50,000 attendees, took place as well where the company focused on its AWS cloud services expansive growth initiatives. Year-to-date the stock is higher by +44.5% following at +56.0% gain in 2017.

Tiffany & Co. (TIF), the storied jewelry retailer, disappointed Wall Street this week with its third quarter results. Revenue grew by +4% for the quarter but this follows double-digit growth in the prior two quarters as illustrated in the accompanying graph. The company pointed to Chinese consumers spending less at their stores while traveling. Earnings per share did meet expectations and the company confirmed guidance for the remainder of the year. Tiffany’s stock dropped -11.1% for the week and is off its summer high by -34.8%.

Source: S&P Compustat;

Marriott International (MAR), the global operator of hotels and timeshare properties, disclosed it had a cyber breach impacting as many as 500 million customers as far back as 2014. Marriott’s stock dropped -5.6% on the day of the announcement but only closed the week lower by -1.9%.

Economic Indicator - Reported

An update on the U.S. Gross Domestic Product (GDP) for the third quarter left the number unchanged at +3.5%. This was a very strong quarter but economists had expected the revision to come in at +3.6%.

The housing market is showing weakness across the board. The S&P Case-Shiller Housing Price Index was flat for the month coming in well shy of the expected +0.3% gain. The year-over-year gain is still an impressive +5.1% but this is the lowest annual gain in 2 years. In a separate report, new homes sales came in at an annualized 544,000, down -9.8% and well below the forecast of 589,000. Rising interest rates are being pointed to for the slowdown.

Consumer Confidence slipped in November for the first time in 5 months, coming off an 18-year high, to a reading of 135.7 from 137.9 in October. Consumers are concerned about the potential for the lack of wage growth and possible slowing business conditions in the future.

Economic Indicators – Upcoming

The November employment report is expected to show the economy adding 201,000 for the month which would be consistent with the long-term trend but below last month’s 250,000. Economists forecast the unemployment rate will remain unchanged at 3.7% and average hourly earnings will increase by +0.2%.

U.S. productivity, a measure of output for each hour worked, is an important ingredient to both a growing economy and lower inflation. It is expected that productivity increased by +2.3% in the third quarter following a strong second quarter number.

Motor vehicle sales are expected to have slowed in November falling to an annualized 17.2 million down from 17.5 million a month earlier.

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