Market Commentary - Week Ending 2/3/2018
- Stocks decline as some volatility returns to the market
- Earnings reports come in very strong for Amazon, Apple, and more
- The U.S. economy adds more jobs than expected in January
The not-so-surprising stock market selloff
Stocks do sometimes still go down! Markets all around the world delivered this simple reminder this week including a -665 point in the Dow Jones Industrials on Friday resulting in a cumulative loss for the week of -1,096 points or -4.1%.
Daily Declines of -2% or More
Last 50 Years: 1 in every 40 days
Current Bull Market: 1 in every 41 days
This relative rough week wiped out more than half of the year’s strong gains. This decline wasn’t something I predicted, nobody can accurately predict such moves, but the selling did not come as a surprise. Consider that during the past 50 years the Dow Industrials has fallen by more than -2% in a single day approximately 1 in every 40 trading days or once every 8 weeks. Given that it had been more than 350 days, or nearly 9 times longer than normal!, since the last daily decline of this magnitude, it really should not have come as a surprise to investors.
There has been a lot of talk about the low volatility of the stock market in recent years. This has been true but it is also entirely normal for a bull market as stocks have consistently been less volatile when they are rising than when they are falling. Furthermore, if you measure volatility by the frequency of daily declines in excess of -2%, our current 9-year bull market has been entirely consistent with the past 50 years.
Forecast for the Future?
The logical next question is whether or not big daily declines provide some sort of forecast for the future and expected stock market returns. Certainly a single daily decline of -2.5% doesn’t suggest anything certain about the future. Friday’s decline this week was preceded by a -1.37% decline on Tuesday so the question becomes whether or not multiple large daily declines in a short period of time tell us anything. Again, there’s nothing certain.
During our current 9-year bull market, the Dow Industrials has two large daily losses within three days in September 2016. The Dow has gained +41% since then in less than 16 months. The same happened during Brexit in June of 2016. More interesting was in December 2015 and early 2016, the Dow Industrials fell more than -1% during 1 of every 3 trading days during a 45-day stretch. The Dow is up +63% in just over 2 years since that happened.
There is one example after another of daily volatility increasing and the bull market continues to rage on. Furthermore, a significant increase in volatility tends to be seen more often when stocks are hitting lows than when hitting highs in the cycle. The simple truth is that a daily selloff like we had on Friday, and even multiple daily selloffs that are close together, does not provide any reliable forecast about future stock market returns.
Market Performance Summary
Source: S&P Compustat, www.yahoo.com/finance for Commodities
Notable Market Headlines
The stock market selloff was widespread during the week with market not only in the U.S. but around the world dropping in value. U.S. large stocks, as measured by the S&P 500, declined -3.9%. This cut the year’s gains by more than half leaving large stocks up +3.2% in 2018. Of the 500 stocks in the S&P 500, only 42 were higher. Small U.S. stocks fared only slightly better with a drop of -3.6% and are now up just +0.9% for the year. The tech-heavy NASDAQ, often falling more than the other indexes during recent market declines, was down -3.5% in line with other indexes.
Energy stocks were the worst performing sector with a loss of -6.7%. The runner up was the year’s leading sector, healthcare, down -4.8% for the week. A portion of the loss for healthcare stocks was the result of Amazon, banking giant J.P. Morgan, and Warren Buffet’s Berkshire Hathaway saying they are forming a venture with the goal of lowing healthcare costs for their employees. This could lead to pricing pressures for the healthcare industry long-term.
International stocks fell in unison with U.S. stocks with developed markets down -3.6%. Germany’s market was one of the bigger losers down -4.7%. Emerging markets fell the most with a loss of -5.8% for the week. Emerging markets are still higher by more than +4% for the year but, like the U.S. markets, this week cuts the year’s gains by more than half.
Diversification into non-traditional asset classes did help mitigate some of the losses in a portfolio this week. Both Commodities and Gold fell by less than half that of stocks with commodities down -1.7% and gold off just -1.3%. Commodities are still looking very good for the year with a gain of +7.7%. Real estate resumed its decline after a one-week reprieve, down -3.3% this week and off -6.9% for the year.
Bonds, often rising when stock prices fall sharply, did not this week as they fell -1.1% and are lower for the year by -2.0%. Yields are reaching multi-year highs as expectations remain very high that the Federal Reserve will raise interest rates multiple times in 2018 on the heels of strong economic data both in the U.S. and around the world.
Winners and Losers by Sector
Source: S&P Compustat
Amazon (AMZN) was one of the few winners in the market this week. The company reported very strong results for its most recent quarter with revenue growing 38% topping $60 billion and net income of $1.86 billion. The company’s Amazon Web Services business is a huge contributor to the bottom line in spite of being only a fraction of the company’s total sales as illustrated in the accompanying graph. In addition to the earnings report, the company said it is joining forces with J.P. Morgan (JPM) and Berkshire Hathaway (BRK.A) in an initiative to bring down healthcare costs for its employees. The stock gained 2.0% for the week and is higher by +22.3% year-to-date.
Newell Brands (NWL), the marketer of consumer goods such as Tupperware and Sharpies, was one of the best performing stocks this week, gaining +10.5% while the rest of the market declined sharply. The only news of any significance is that the company is executing on its plan to transform the business in a variety of ways. This stock is currently rebounding from a terrible 2nd half of 2017 and early 2018 resulting in a loss of more than half its value during that short time due, in part, to disappointing earnings as discussed in our blog. The company is expected to report earnings for the most recent quarter on February 16.
Apple (AAPL) had a difficult week with its stock down -6.4% or shedding $56 billion of its total market value. This decline came in spite of the company reporting strong quarterly results with both sales and earnings above Wall Street estimates. The disappointment was weaker-than-expected iPhone sales and guidance for the next quarter that was lower than expectations. The stock is now more than -10% below its January 18th all-time high.
Alphabet Inc. (GOOGL), the parent company of search engine giant Google, reported quarterly sales that were slightly above Wall Street expectations but earnings per share that were slightly below. The revenue growth of +22% was helped mostly by mobile search and YouTube. Hurting the bottom line was an increase in Traffic Acquisition Cost (“TAC”) which are fees paid to partner website that run Google ads and services. All said, investors were disappointed and the stock fell -5.8% for the week but remains higher year-to-date by +6.2%.
Economic Indicator - Reported
The January employment report came in meaningfully stronger than economists had forecast with 200,000 new jobs added during the month. It was above the average forecast and near the high end optimist expectations. The job gains were across many sectors of the economy including manufacturing adding 15,000, construction gained 36,000, and retail traded grew by 15,000. The unemployment rate held steady at 4.1%.
There are some signs of wage inflation with the year-over-year change in hourly earnings rising to +2.9% which is the highest during this very long economic recovery. Furthermore, the average workweek fell to 34.3 hours from 34.5 which could be a sign of a lack of available workers that could ultimately hold back economic growth.
The Case-Shiller Housing Price Index for 20 large cities increased +0.7% in the most recent month, slightly more than had been forecast, with the year-over-year gain coming in at +6.4%. San Francisco saw the biggest surge in prices up +1.8% which follows a +1.3% rise in both of the prior months. A couple of cities showing the slowest annual gains are Washington, D.C. and Chicago both showing gains at about half the national average.
Fourth quarter productivity came in at a very disappointing -0.1% as compared to economists’ forecast of +1.1%. This means that economic output increased by +3.2% but it took 3.3% more hours to accomplish the increase. Increased productivity is important to both long-term economic growth and an increase in the standard of living. Meaningful improvements have been lacking during this economic expansion but hopes are that companies will use tax cuts to make investments that will help.
Consumer sentiment came in stronger than expected at a reading of 95.7 which was also a gain of the prior month. A positive outlook for the future helped fueled this rise in sentiment. The Consumer Confidence index also posted a better than expected gain to a reading of 125.4 and is just below the 17-year high. This index was also helped by positive expectations about the future.
Economic Indicators – Upcoming
There are no major economic reports expected in the coming week.