Market Commentary - Week Ending 2/10/2018

Summary

Market Performance Summary

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

Notable Market Headlines

U.S. stocks had their worst week since the Financial Crisis 10 years ago with large U.S. stocks falling -5.2%. The low point come at Thursday’s close which was followed by a rally on Friday that recovered some of the week’s losses. U.S. small stocks fell -4.6%, hanging in slightly better than large stocks for the week but are still under performing year-to-date. The worst performing sector for the week was energy stocks losing -8.0% and are now lower by -8.2% for the year. Oil prices falling below $60 per barrel hurt these stocks.

In point terms, the Dow Jones Industrials – lost 1,330 points and swung several hundred points every day. From its top just 2 weeks ago it has fallen -2,426 points and was off -10.3% at Thursday’s close. The tech-heavy NASDAQ has weathered this selloff relatively well, down -9.7% at Thursday’s close from its January 26th peak. Some market observers expected the NASDAQ to fall harder during a selloff given its very strong performance during the past year.

International stocks posted similar declines for the week with developed country stocks down -5.5%. Emerging markets fell a very similar -5.4% with notable performance from India’s market down just -1.5% for the week. Year-to-date emerging markets on average are lower by -1.5% with one outlier being Brazil’s 2018 gain of +6.7%. Although emerging markets are down with the rest of the world, they are holding up better than some expected. These are markets that, some during times of overall fear in the market, can collapse quickly.

Real estate stocks held up reasonably well this week with a loss of just -3.7% but are having a very disappointing year with a loss of -10.4%. Rising bond yields is believed to put downward pressure on real estate stocks given that many investors buy these stocks for their high dividend yields.

The bright spot this week was gold losing only -1.3% and remaining higher year-to-date by +1.0%. if inflation does return to the economy as some believe, the price of gold is likely to rise but we have yet to see such movement. Commodities fell sharply for the week, losing -6.3%, as the price of oil fell.

Bonds continued to lose value this week, down -0.4%, and are down -2.5% for the year. This is an aggregate of many types of bonds and, of course, all of them do not perform the same. Government bonds were flat this week as investors often flock to these bonds during times of market declines. High yield bonds, among the more risky, did decline -1.5% this week, meaningfully more than the average bond but, like other risky investments, did not show any signs of investor panic.

Stock Highlights

CBOE Global Markets (CBOE), an operation of stock and options exchanges and a wide range of investment products, was the worst performing S&P 500 stock this week. On Monday, the company’s extremely popular volatility index, the VIX, surged more than 100% resulting in the failure of some investment products designed around the VIX. This stock has been a strong performer, up +68.6% in 2017 and hitting new highs in 2018 but fell this week by -20.5%.

TripAdvisor (TRIP), the very popular travel website, was the best performing stock of the S&P 500 this week. During Monday’s big market decline, 498 of the S&P 500 stocks were lower…this was one of the two that moved higher. One Wall Street analyst put out a research note saying the company was a takeover candidate, a long running rumor for this company. Investors may get more information on this rumor soon as the company is expected to report earnings February 14th. The stock gained 11.5% for the week.

Tapestry (TPR), a designer of luxury accessories formerly known as Coach, reported earnings that were better than expected on strong holiday sales. Total sales were higher by 35% in the quarter fueled by a better-than-expected increase in same-store sales by +3%. As the accompany graph shows, the company’s sales growth stalled earlier last year but has since resumed strength. The company raised earnings expectations for the remainder of the year. Its stock gained +6.7% for the week.

Several consumer stocks held up well during the week’s overall market decline sparking some conversation as to whether or not the retail sector is turning around from its slump. Only time will give us an answer to this question but the performance of the below stocks certainly provided some shelter during the week’s declines:

Economic Indicator - Reported

The extremely volatile week for the stock market was accompanied by nearly no economic data. Some market watchers though are saying it’s all about economic data that cause the selling starting the prior Friday following the employment report showing signs of possible wage inflation.

Economic Indicators – Upcoming

Because the possibility of higher inflation is being blamed by some investors for the market’s selloff, reports on inflation are going to be that much more important. The Consumer Price Index (CPI), a measure of retail inflation, will be reported with expectations of a +0.3% gain from the prior month and up +2.0% year-over-year. Excluding the volatile food and energy sectors, the gain is expected to be just +0.2%.

The CPI report will then be followed the next day with the Producer Price Index (PPI), a measure of wholesale inflation, which is estimated to by higher by +0.4% for the month but only +0.2% when ignoring food and energy prices. This report showed price declines in the prior month.

Retail Sales, making up two-thirds of the economy, are forecast to have increased by +0.3% in January following a strong report for the prior month of +0.4%. Excluding autos and gas sales, which have been relatively week, the report is expected to be even stronger for January. A strong consumer is certainly important to a strong economy so investors will be watching this report closely.

Industrial Production is forecast to have increased by a modest +0.2% following signs of weakness in the January employment report for the manufacturing sector. Other reports will include January Housing Starts forecast to have snapped back from a weak December and Consumer Sentiment for February is expected to have remained steady near its multi-year highs.

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