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11 August, 2018 Market Commentary

Market Commentary - Week 32 2018


Market Commentary - Week Ending 8/11/2018

Summary

  • A crisis in Turkey has sent their market sharply lower for the year and created fears throughout the world
  • Berkshire Hathaway, Warren Buffett’s company, posted strong second quarter earnings reflecting a strong economy
  • Inflation, both retail and wholesale, remain tame

Market Performance Summary

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

Notable Market Headlines

A crisis in Turkey was blamed for sending markets around the world lower this week although U.S. stocks held up relatively well. Turkey’s currency fell to a record low relative to the U.S. dollar as President Trump applied additional economic pressure apparently related to Turkey’s detention of a U.S. pastor.

As the accompany graph shows, Turkey’s stock market has collapsed in 2018 losing -48% of its value year-to-date with -20% of that occurring this week. To put this in perspective, the total value of all stocks on the Turkey exchange is $227.5 billion as of the end of 2017 or less than 1% of the value of U.S. traded stocks.Therefore, the dollar value of loss in Turkey’s market is relatively small but questions remain as to the impact Turkey could have on European banks and if Turkey could simply be the first domino to fall.

Source:www.yahoo.com/finance ETF symbol TUR

In spite of the crisis in Turkey, U.S. stocks generally avoided the declines experienced by many markets around the world with large U.S. stocks down just -0.2% as measured by the S&P 500. Many of the largest technology stocks actually posted gains resulting in the NASDAQ Composite gaining +0.3%. Small U.S. stocks hung in well with a gain of +0.6% with investors possibly again favoring stocks believed to be less impacted by a potential continued trade war.

International stocks had a rough week across the board with developed markets falling -2.0%. The losses were widespread throughout Europe, Australia, and Japan. In Europe, Spain and Italy were among the worst falling -3.7% and -3.8% respectively. Emerging markets fared even worse declining -2.3% for the week. The largest of emerging markets, China, actually gained +1.5% but this gain was offset by sizeable losses elsewhere including Brazil’s stocks down -9.9% this week alone as well as Russia’s market off -8.3%. Year-to-date developed markets are lower by -5.1% and emerging markets by -8.3%.

The alternative asset classes provided little help this week. Real estate was the biggest loser in this group falling -1.7% but did stay just above the flat line for the year. Commodities lost -1.0% on lower oil prices but are still higher by +4.5% in 2018. Gold held up the best this week, down just -0.2%, but is among the worst performers year-to-date with a loss of -7.2%. If stock markets continue to decline, gold could become a safe haven for investors.

Overall bond prices moved higher this week resulting in lower yields. The all-important U.S. 10-year Treasury yields closed the week at 2.871% which is meaningful off the recent high just above 3%. The continued strong economy is expected to keep downward pressure on bond prices but, if fears in the stock market persist, bonds could attract more money and keep prices higher.

The overall move higher for bond prices was certainly not the case for ALL bonds. The bonds of international emerging markets, much riskier bonds that have attracted some investors due to their higher yields, fell sharply this week losing -1.8%. These are now down -8.4% for the year.

Stock Highlights

Century Link (CTL), a $21 billion in revenue provider of data networks and internet services, was the best performing stock in the S&P 500 for the week. The company reported better than expected earnings and management raised guidance for the remainder of 2018. Helping drive results is the successful integration of a large acquisition last year. The stock did have a great week as result of the strong quarterly results up +13.5% and +28.2% for the year but, as the accompany graph shows, the stocks is still far below all-time highs.

Source: www.YahooFinance.com

Warren Buffett’s Berkshire Hathaway (BRK.B) reported strong quarterly results, well ahead of Wall Street estimates, helped by a rebound in its insurance underwriting business as well as growth in many of its other business fueled by a strong economy. Berkshire owns companies in a variety of sectors including insurance, chemicals, energy, railroads, food, retail, and more. Some companies that are wholly owned by Berkshire include:

  • Geico Insurance
  • Nebraska Furniture Mart
  • Fruit of the Loom
  • Heinz Kraft Food
  • Duracell Batteries
  • Dairy Queen
  • BNSF Railroads
  • See’s Candies
  • Pampered Chef
  • + approximately 80 more!

The combined annual revenue of the Berkshire companies has increased more than 100-fold during the past 30 years to $238 billion. Its stock price has gained nearly 100-fold during the same time as well.

Newell Brands (NWL), a distributor of a wide range of products under brand names such as Chesapeake Bay Candle, Crock-Pot, FoodSaver, Mr. Coffee, Rubbermaid, Sunbeam, and more, expects to be negatively impacted by new tariffs. The company reported quarterly results including core revenue down 8% from the prior year to $3.73 billion. The CEO said they estimate the new tariffs could reduce revenue by $100 million annually. Newell’s stock was the worst performing in the S&P 500 this week down -21.6% and now off -62% from its June 2017 high.

Economic Indicator - Reported

Inflation reports show continued show prices only inching higher with the Consumer Price Index (CPI) up +0.2% in July, as expected, following a +0.1% gain in the prior month. Year-over-year, the core CPI, excluding volatile food and energy, is higher by +2.4%. Housing, and the overall cost of shelter, along with higher vehicle prices did exceed the average price gains for the month while declining energy prices offset some of those gains.

Wholesale inflation, measured by the Producer Price Index (PPI), surprised economists coming in unchanged for July as compared to an estimate of +0.3%. Even when excluding food and energy, prices were up just +0.1%. A major factor in keeping prices lower, similar to the Consumer Price Index, were lower energy prices for electric power, gasoline, and natural gas.

Economic Indicators – Upcoming

Retail sales for July are expected to be higher by just +0.1% due to a slowdown in vehicle sales. When excluding vehicle sales, the gain is expected to be much more robust at +0.4%.

Economists are expected good news in the report on Productivity and Unit Labor Costs with productivity higher in the second quarter which is then expected to lower unit labor costs.

After an expected drop in Housing Starts in June, expectations are for starts to have improved in July to an annualized 1.271 million. This would put starts back near the higher end of the recent trend and help ease the lack of housing inventory in the market.

Contact Mark A. Patton :