Market Commentary - Week Ending 10/13/2018


  • Stock prices declines meaningfully as investors cope with risking bond yields
  • Some of the riskiest international emerging markets posted gains suggesting that the selling did not reach panic levels
  • The debate rages on as to whether the worst of the market declines are behind us or this is just the tip of the iceberg
  • Big banks kick off third quarter earnings season with generally strong results

Market Performance Summary

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

Notable Market Headlines

Markets everywhere got a dose of volatility this week with prices moving meaningfully lower with the selling pressure the strongest in the U.S. The market declines have been blamed on rising bond yields as the Federal Reserve maintains plans to continue raising interest rates for the remainder of 2018 and throughout 2019. Somewhat surprising though is that bond yields fell this week as bond prices inched higher with investors seeking some safety from the stock market.

471 of the 500 stocks in the S&P 500 index declined leaving this U.S. large stock index lower by -4.1% for the week. The week’s loss wiped away more than half the year-to-date gain that now stands at just +3.4%. The Dow Industrials fell a similar -4.2% while the tech-heavy NASDAQ, although more volatile this week than the other two indexes, closed the week with a slightly smaller loss of -3.7%. For a period of time during Thursday’s trading the NASDAQ dipped into correction territory, defined as a decline of -10% or more from its highs, but recovered some of those loses by Thursday’s close as well as during Friday’s rally.

U.S. small stocks faced more aggressive selling than large stocks with small stocks falling -5.3% for the week and now holding onto just a small year-to-date gain of only +0.7%. The week’s decline put small stocks officially in correction territory now off -11.4% from their August highs.

Although U.S. stocks felt the brunt of the selling this week, the performance of international markets remains far worse year-to-date. For the week international developed markets fell -3.9%, similar to the decline of -4.1% for large U.S. stocks, while year-to-date these international markets are off -13.2%.

The real story was in international emerging markets where some actually performed well for the week. Overall emerging markets were lower by just -1.3%, only about one-third of the loss experienced by markets considered less risky. There were certainly several markets that declined including both South Korea and Taiwan’s markets both down more than -3.5%. Several though rallied including India’s up +3.4%, Brazil’s jumping +5.3%, and Turkey’s surging +6.2%.

Source: S&P Compustat

Some of the riskier emerging markets rallying this week is welcomed news suggesting that the selling that took place did not reach panic levels.  This compares favorably to the selloff earlier this year from the January 26th peak to the low on February 8th when international emerging markets collapsed with every market down -8% or more with the average falling -12.3%.

Investments in alternative assets did help mitigate some of the week’s losses for investors. Both real estate stocks and commodities declined down -2.8% and -2.6% respectively. Driving the decline in commodities was the fall in the price of oil with a barrel of oil now at $71.52 which is off about $5 from its 2018 high hit near the start of October. The price of gold climbed by +1.3% as investors moved into this safe haven asset as often happens when stocks decline sharply.

Rising bond yields have generally been blamed for the decline in stock prices. This week though bond prices rose by +0.3% resulting in lower bond yields. The benchmark 10-year U.S. Treasury closed the week with a yield of 3.162% which is off its recent multi-year high of 3.231%. The Federal Reserve’s plan to continue raising interest rates is expected to keep downward pressure on bond prices which would continue to push yields higher.

What’s Next

It’s impossible to know what’s next for the markets. We saw similar declines earlier in the year and stocks came rallying back to hit new highs. The bulls on Wall Street see a repeat of this coming. The argument is that earnings are strong, the economy is strong, and we’re going into months when stocks tend to move higher.

On the other hand, the bears will argue this week’s declines are just the beginning. Continued hikes in interest rates by the Federal Reserve could push bond yields higher and cause more fear for investors. Arguably the Fed has a long way to go to get interest back to a normal level in an economic environment such as we have plus the Fed still has to unwind its massive balance sheet. Further fueling the bears story are concerns about a prolonged trade war, geopolitical concerns, and historically high stock valuations.

The bottom line is that there is no way to know. Long-term investors should stay invested. That’s what long-term investors do! Missing a significant market rally and/or continued bull market would be detrimental for long-term investors.

Stock Highlights

L Brands (LB), a women’s specialty retailer with brands including Victoria’s Secret and Bath & Body Works, was the best performing stock in the S&P 500 this week gaining +10.3%. The company said it is considering selling its La Senza business, a lingerie business with 314 stores, so it can focus more on its core business. In spite of the week’s rally, the stock is still off -47.9% for the year continuing a sharp decline that started in late 2015 as illustrated in the accompanying chart.

Source: www.YahooFinance.com

Banking giant J.P. Morgan (JPM) reported third quarter sales and earnings with both topping Wall Street estimates fueled by strong growth in its consumer banking unit. The stock initially rallied on the news but then declined closing the week down -6.7%. Citicorp (C) and Wells Fargo (WFC) also reported strong quarterly results. Their stocks faired the week better with losses of just -3.6% and -2.0% respectively. There is some concern that these stocks will remain under pressure if bond yields continue to rise.

Fluor Corp. (FLR), a nearly $20 billion in revenue engineering and construction business, was the worst performing stock in the S&P 500 for the week. The company warned it would miss its revenue target resulting in its stock plummeting for the week by -20.5%. Revenue has been an ongoing challenge for the company as illustrated in the accompanying graph following a peak in 2012 but stabilizing somewhat the past couple of years.

Source: www.YahooFinance.com

Economic Indicator - Reported

Inflation remains tame with the Consumer Price Index (CPI) increasing by just +0.1% in September versus an estimate of +0.2%. The core rate, excluding food and energy, also came in at +0.1%. A decline in energy prices as well as a small +0.1% rise in housing prices, the largest component of the index, kept overall prices tamed. This month’s report leaves the year-over-year gain at just +2.3%.

The Producer Price Index (PPI) also showed little signs of inflation rising +0.2% for the month as expected. Similar to the CPI, when excluding food and energy, the core PPI also gained just +0.2%. One component of this index putting upward pressure on prices is transportation as there has been a lack of both trucks and truck drivers to move goods.

Higher inflation rates would fuel concerns that the Federal Reserve may feel compelled to raise rates faster than they have planned. Both of these inflation reports for September fortunately do not fuel this fear.

Consumer Sentiment slipped slightly in the preliminary October reading versus September’s but remains very strong. Less favorable views of personal finances by consumers had a negative impact. Some of this consumer surveying was done after Wednesday’s sharp market decline but it was reported that the market’s drop had virtually no impact on the results.

Economic Indicators – Upcoming

Retails sales for September are expected to have increased by +0.6% following an unexpected soft number in August. Excluding autos, which are expected to get a bump from replacements due to Hurricane Florence, retails sales are still expected to show a strong +0.4% gain.

Industrial Production, a measure of mining, manufacturing, and the utilities industries, is expected to show growth of a modest +0.2% compared to a prior month gain of +0.4%.

Housing starts are expected to have declined in September to an annualized 1.216 million units. Existing home sales are also expected to show a modest drop for the month to 5.300 million units.

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