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Monthly Market Insight - November 2018

Monthly Market Insight - November 2018

November 16, 2018
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US Markets

Stock prices took investors on a volatile ride in October as interest rates, global economic health concerns, and a smattering of disappointing corporate earnings reports dominated trading.

The Dow Jones Industrial Average dropped 5.1, percent while the Standard & Poor’s 500 Index lost nearly 7 percent. The NASDAQ Composite fell 9.2 percent.1

The month started out strong on news that Canada would be joining Mexico and the U.S. in a revamped trade agreement. But investor enthusiasm quickly faded as rising interest rates sent stocks lower.

Magnitude and Speed

While higher interest rates were expected, the magnitude and speed of the rate increase caught many investors by surprise. The flight from equities accelerated on signs of slowing global economic growth and more trade concerns with China.

Market sentiment turned positive mid-month on strong economic data, but again quickly faded. Waves of selling in late October were fueled by tepid 2019 guidance in key earnings reports. At one point, the Dow Jones Industrials and S&P 500 turned negative for the year, and the NASDAQ Composite entered correction territory.

Stocks staged a powerful rally in the final two days of the month with a string of solid earnings releases, giving some relief to wary investors.

Focus on Guidance

Corporate earnings reported in the third quarter have been exceeding expectations. But investors have been looking for economic clues in the companies issuing negative 2019 guidance.

With 48 percent of the S&P 500 companies reporting earnings, 77 percent of those have reported a positive earnings surprise, and 59 percent a positive sales surprise.2 But through October, 26 S&P 500 companies issued negative earnings guidance for 2019, compared with 15 who have guided forecasts higher.3

Sector Scorecard

Utilities (+3.19 percent) and Consumer Staples (+2.97 percent) were the two bright spots during the month. Communication Services (-7.94 percent), Consumer Discretionary (-11.24 percent), Energy (-11.87 percent), Financials (-6.02 percent), Health Care (-6.90 percent), Industrials (-11.54 percent), Materials (-10.41 percent), and Technology (-10.14 percent) ended the month lower. Real Estate was flat (-0.25 percent).4

What Investors May Be Talking About in December

In recent weeks, the U.S. has signed new trade agreements with South Korea, Canada, and Mexico, while working on trade talks with the European Union. The agreements have been a welcome relief to businesses and investors, but the trade dispute with China remains unresolved.

The trade stalemate has been a persistent worry overhanging the market. Rising interest rates were a factor behind the market’s October drop, but concerns about global economic growth related to trade issues has also contributed to the sudden reversal in sentiment.

It’s uncertain if these recent trade deals will help negotiations with China. Some believe that the elimination of multiple parallel trade negotiations will benefit U.S. interests as the economic impact of tariffs begin to weigh on China’s economy.

On the other hand, China may not feel especially pressured anytime soon, since it has a number of tools to help offset the impact of tariffs, including fiscal and monetary stimulus. Investors may start watching decisions by China’s economic policy-makers for indications of how deeply the country may dig in its heels.

Meanwhile, investors shouldn’t lose sight of the potential impact of the higher costs of Chinese imports on American consumers, which may factor into corporate profits.

World Markets

The stock market drop in the U.S. was mirrored in overseas markets, with the MSCI-EAFE Index slumping 9.4 percent.5

European markets battled global headwinds as well as those closer to home, including Italy’s budget standoff with the European Union, the Brexit negotiations, and the potential leadership change confronting Europe’s biggest economy (Germany).

Major markets struggled, with Germany dropping 6.5 percent, France falling 7.3 percent, and the U.K. sliding 5.1 percent.6

Stocks in the Pacific Rim countries also struggled as Australia fell 6.1 percent, Japan 9.1 percent, and Hong Kong 10.1 percent.7

Indicators

Gross Domestic Product

The economy grew 3.5 percent in the third quarter, powered by the most robust consumer spending uptick in almost four years. GDP growth was dampened by weak business investment and a drop in exports.8

Employment

The number of net new jobs rose by the lowest amount in a year, with nonfarm payrolls increasing by 134,000. Despite the slowdown in hiring, the unemployment rate fell from 3.9 percent to 3.7 percent, touching lows not seen since 1969. Wage growth remained subdued, staying under three percent year-over-year.9

Retail Sales

Spending by Americans in September rose 0.1 percent, which was under economists’ consensus expectations for a 0.7 percent rise.10

Industrial Production

Output by the nation’s factories, mines, and utilities rose 0.3 percent, the fourth-consecutive month industrial production has increased. Industrial output was up 5.1 percent over September of 2017.11

Housing

Housing starts declined 5.3 percent as rising borrowing costs and higher home prices dampened new construction. Despite the recent stretch of weakness, housing starts are 6.4 percent higher in the first nine months vs. the same period last year.12

Purchases of new homes fell 5.5 percent in September. Sales through the first nine months are modestly higher, up 3.5 percent, compared to the same period in 2017.13

Existing homes sales fell 3.4 percent, as lower inventory, higher mortgage rates, and reduced tax benefits of homeownership continued to weigh on the housing market.14

Consumer Price Index

Consumer prices showed little sign of inflationary pressures, rising just 0.1 percent in September. Year-over-year, the Consumer Price Index increased 2.3 percent, representing the smallest 12-month jump since February.15

Durable Goods Orders

Defense-related orders drove durable goods orders to a 0.8 percent jump in September, bringing the year-to-date increase to 8.9 percent compared to the same period last year.16

The Fed

Minutes from the Fed’s September meeting showed debate among members over interest rate policy. Some believed interest rate hikes should be accelerated to cool down a potentially overheated economy. Others argued that rate hikes should only occur after appropriate signs have emerged.

The consensus was to raise the federal funds rate in September, with a likelihood of one more rate increase before the end of the year. The Fed has two more meetings on the 2018 calendar -- the first ends November 8th and the other on December 19th.

Fed Chair Jerome Powell has stated that he believes interest rates are still considered accommodative for economic growth, with more hikes necessary until rates became a more neutral factor to growth.17

  1. The Wall Street Journal, October 31, 2018
  2. FactSet Research Systems, Inc., October 26, 2018
  3. FactSet Research Systems, Inc., October 26, 2018
  4. FactSet Research Systems, Inc., October 31, 2018
  5. MSCI.com, October 31, 2018
  6. MSCI.com, October 31, 2018
  7. MSCI.com, October 31, 2018
  8. The Wall Street Journal, October 26, 2018
  9. The Wall Street Journal, October 5, 2018
  10. The Wall Street Journal, October 15, 2018
  11. The Wall Street Journal, October 16, 2018
  12. The Wall Street Journal, October 17, 2018
  13. The Wall Street Journal, October 24, 2018
  14. The Wall Street Journal, October 19, 2018
  15. The Wall Street Journal, October 11, 2018
  16. The Wall Street Journal, October 25, 2018
  17. The Wall Street Journal, October 17, 2018