Market Commentary - Week Ending 2/10/2018
- Stocks have their worst week since the 2008 Financial Crisis
- Earnings reports remain strong and company raise earnings expectations for the year
- Oil falls below $60 per barrel putting downward pressure on energy stocks
Signs of a Bull or Bear market?
We’ll evaluate below whether or not this past 6 weeks of market behavior is any indication of a continued bull market or coming bear market. Before we do that, let’s put the last 6 weeks in perspective.
Let’s go back to your New Year’s celebration and remember the good feeling you had about your portfolio’s performance in 2017…it was a great year! Suppose you made a resolution to take a break from financial news...you just were not going to look for 6 weeks. You now open your eyes, we are 6 weeks into the year and the S&P 500, the barometer for large U.S. stocks is off -2.0%, giving back a small fraction of the prior year’s gains. I guessing most investors would shrug their shoulders and not think much of it. That’s where we are today!
The accompanying graph shows the performance of all the major market indexes year-to-date. It’s not bad except for real estate stocks. U.S. small stocks continue to underperform as they did in 2017. International stocks, both in developed and emerging markets, are tracking very close to the U.S. markets. Although real estate is doing poorly, the two other alternative investments, gold and commodities, are holding tough in positive territory. Bonds have been a disappointment with losses similar to stocks. All and all, it’s pretty uneventful.
Of course none of us have had our eyes closed the last 6 weeks. It has been a pretty exciting ride for investors as the accompanying graph shows. Stocks came out of the gates strong during the first 4 weeks of the year surging +7.5% and have since given back all of those gains and a little more during the past 2 weeks. From peak-to-trough, the January 26th high through Thursday’s low, it’s been a -10% correction many have said is way overdue.
There are a variety of theories about what’s driven this -10% correction. The most popular seems to be concerns about signs of inflation. Inflation would push bond yields higher, possibly force the Federal Reserve to raise interest rates more than originally expected, and put downward pressure on stocks.
Another theory is that investor of all types were over-exposed to the market…owning more stocks than they should long-term. Both individuals and institutions often borrow money to increase their holdings in stocks which works great while stocks move higher and have little volatility. But when stocks turn volatile and lower, this strategy compounds losses and forces investors to liquidate positions.
When looking at the above graph and living through this exciting 6 weeks, the question is: when has this happened before? The following table shows such periods. These are periods when stocks have surged more than +7% in less than 30 days and then given back the majority or all those gains shortly thereafter.
I initially found this data very interesting but then began to wonder if it really tells any story at all! Of the 20 times when stocks surged more than +7% in less than 30 days and then quickly gave back the gains, 9 were during bear markets with 11 during bull markets. The only conclusion I get from this is that the odds are about the same for this to occur during both bull and bear markets.
The next question: when during the bull or bear market cycle did this behavior occur? For example, when there was a surge and immediate decline during bull markets, like we have just experienced, did this happen at the end of the bull market? There’s no consistency. Sometimes this happened at the very beginning of a new bull market and sometimes at the very end and nearly everywhere in between.
Market behavior like we’ve seen during the past 6 weeks feels extreme. Logic would suggest to some investors that it must be an indication of something. I suppose it is an indication of something but I’m not sure what! Based upon the past 55 years of market behavior, the ups and downs of the last 6 weeks doesn’t provide any clear indication as to whether or not the bull market is coming to an end or if it continues on for many years to come.
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.
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.