Market Commentary - Week Ending 12/8/2018

Summary

Market Performance Summary

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

Notable Market Headlines

It was another rough and volatile week on Wall Street. Investors had a great deal of optimism on Monday about thawing trade tensions between the U.S. and China and with stocks starting the week sharply higher. This optimism quickly faded given the lack of details about the trade negotiations as well as the arrest of a prominent Chinese business executive at the request of the U.S. government.

At the close of the week U.S. large stocks, measured by the S&P 500, were down -4.4% and once gain negative for the year by -1.2%. The Dow Jones Industrials and the tech-heave NASDAQ Composite were off similar amounts with the NASDAQ the only index of the three still in positive territory year-to-date by just a fraction of a percent. U.S. small stocks fared worse than large with a loss for the week of -5.6% and are now down -5.5% for the year.

This week is one that saw more aggressive growth stocks fall by nearly an equal amount as more conservative value stocks down -4.7% and -4.2% respectively. The full year though has been one where these two groups of stocks have NOT performed similarly as the accompanying graph illustrates.

Source: www.yahoo.com/finance Growth Stocks (IWF), Value Stocks (IWD)

As you can see in the graph growth stocks had a very strong first nine months of the year gaining +16.8% through the end of September while value stocks were only higher by +3.7% during the same time. Since the peak at the end of September though growth stocks have fallen nearly twice as fast as value stocks. Some investors have argued that growth stocks have become too expensive and are due for a sharp fall while value stocks have been neglected and represent good values. All that said, investors have been better off in the riskier growth stocks as they have gained +1.4% year-to-date while value stocks are lower by -4.9%.

The worst performing sector in the market were Industrials including such stocks as Caterpillar (CAT), Cummins (CMI), and Boeing (BA) as they are seen being most impacted by continued trade tensions with China. Utilities were the best performing group of stocks, up +1.6%, as investors flocked to these relatively safe stocks.

International stocks were lower as well but did not decline quite as much as those in the U.S. Developed markets lost -3.2% for the week with stocks lower across all major regions. International emerging markets fell -2.9% for the week. Hong Kong’s market held up surprisingly well with a loss of just -0.7%. Year-to-date developed markets are down -13.6% and emerging markets have fallen -15.4%.

The non-traditional asset classes meaningfully helped reduce losses this week for investors with well-diversified portfolios. Real estate stocks gained +0.3% with investors most likely attracted to their strong dividend yields and possible signs that interest rates may not rise as much as originally thought. These stocks are now higher year-to-date by +2.0% topping the U.S. market indexes after having been well behind earlier in the year.

Gold was higher by +2.2% but still is lower year-to-date by -4.5%. It has to be assumed that investors are seeing gold as a safe haven during these volatile times for stocks. Commodities were also higher for the week, up +2.4%. This is the first decent gain for commodities in some time following what has been a very sharp decline since the end of September.

Bond prices posted some very strong gains up +0.5% for the week. Comments by the Federal Reserve that they intend to take a more measured approach to future interest rate hikes along with the drop in stocks with investors presumably buying bonds instead help drive bond prices higher.

Stock Highlights

AutoZone (AZO), one of the nation’s leading auto parts retails, reported strong quarterly results. The company operates 5,631 stores in the U.S. including 13 opened during the quarter as well as adding three new stores in Mexico. Total revenue for the quarter came in at $2.64 billion resulting in earnings per share of $13.47 which easily topped Wall Street estimates. This strong report resulted in the stock rallying +7.6% for the week making it the best performer among the 500 stocks in the S&P 500. As the accompanying graph shows, this stock has had an incredible 10-year run from a price just above $100 ten years ago to $870 today!

Source: www.YahooFinance.com

American Airlines (AAL) was among the worst performing stocks in the S&P 500 this week. A relatively strong economy and falling fuel prices are generally good for these stocks but there are concerns. One Wall Street analyst is concerned the economy may be slowing and airlines will use their additional profits from lower fuel costs to expand capacity which could keep ticket costs lower. Many investors apparently share these concerns as the stock fell -16.4% for the week and is lower year-to-date by -35.5%. Other airline stocks fell as well including Alaska Air Group (ALK) down -11.4%, United Continental (UAL) down -8.8%, and Delta (DAL) losing -7.6%.

Insurance stocks tend to be viewed as more conservative stocks and would be expected to hold up better in a market selloff but that was not the case this week. Brighthouse Financial (BHF), American International Group (AIG), Lincoln National (LNC), and Principal Financial Group (PFG) all fell twice as much or more than the market this week and are all down sharply year-to-date. Impacting the stocks currently are large losses expected due to weather-related events in the fourth quarter.

Source: S&P Compustat

Economic Indicator - Reported

The November employment report disappointed investors with only 155,000 new jobs added during the month versus economists’ expectations of 201,000. The unemployment rate remained unchanged and at 49-year lows at 3.7%. This low unemployment rate combined with a relatively strong economy has created concerns about wage inflation that is at 3.1% year-over-year which is a 9-year high.

Consumer sentiment was unchanged for the month at 97.5 which was slightly better than economists had expected and near multi-year highs. Consumers are a little more optimistic about current conditions but a little more pessimistic about the future. In particular, there was an increased concern about future job opportunities which is not entirely consistent with trends in the labor market.

Motor vehicle sales did not slow as economists had expected coming in at an annualized rate of 17.5 million vehicles. This was unchanged from the prior month.

Economic Indicators – Upcoming

The Consumer Price Index (CPI) and the Producer Price Index (PPI) are both forecasts to come in with modest gains for the most recent month.

Retails sales for November are expected to have increased by a small +0.1% as compared to October’s +0.8% jump. Sales during the holiday shopping season are expected to be higher by +4.5% but, apparently, much of this is expected during December.

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