Market Commentary - Week Ending 12/22/2018


  • Stocks suffered some of their worst losses in years as investors deal with a host of risks
  • International markets held up meaningfully better than U.S. markets but remain worse off year-to-date
  • Economic data suggests the housing market is stabilizing but has slowed considerably from a year ago

Market Performance Summary

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

Notable Market Headlines

It was a rough week for investors in stocks, in particular, in U.S. stocks. The week started with relatively aggressive selling and lower prices and it never let up. Some of the same stories and concerns seem to still be capturing the attention of investors including the ongoing trade war with China, slowing economic growth around the world, a government shutdown, and rising interest rates.

Rising interest rates were the biggest headline this week with the Federal Reserve raising rates again as expected by +0.25%. Arguably this should have been no surprise to investors but stocks fell sharply following the announcement. Some market-watchers pointed to the Fed’s comments that it still intends to raise interest rates further in 2019 but will only do so based upon the strength of the economy. Apparently investors were hoping to hear more conclusively that there would be no further rate hikes.

At the close of the week U.S. large stocks were lower by -7.1% as measured by the S&P 500. The Dow Jones Industrials did marginally better with a loss of -6.9% while the tech-heavy NASDAQ suffered the biggest loss of -8.4%. The NASDAQ’s loss put it officially in a bear market now down -21.9% from its late-August high while the S&P 500 and Dow are off -17.5% and -16.3% respectively from their highs.

Let’s put the week into perspective. I’ve heard several commentaries that this was the worst week for stocks since the Depression. This may be true when considering only calendar weeks, a somewhat arbitrary time period, but when consider 5 consecutive trading days, this week’s performance is far less dramatic.

Source: www.yahoo.com/finance, Patton analysis

Since 1950 the S&P 500 has declined by -7% or more, similar to this week’s decline, 45 times. This is about once every 18 months. This year has certainly been worse than average with two such declines so far. It’s not uncommon for the market to go years without such a decline then to have multiple such selloffs in a relatively short period of time.

The week’s selloff was even worse for small U.S. stocks losing -8.7% and now down -15.6% for the year. Every major sector was lower with Energy stocks hit the hardest down -9.7% while Utilities, considered one of the most conservative sectors, down just -5.1%. An additional sign that investors are favoring more conservative stocks was the slightly better return for value stocks, losing -7.2%, over growth stocks down -8.1%.

International markets suffered along with the U.S. but the losses were more contained. Developed markets were off -4.8% for the week with European markets, one of the three developed market regions, off just -3.8%. Emerging markets held up even better with the average down just -3.3%. China, the largest of the emerging markets, lost -5.2%, while India actually gained, up +1.5% for the week, as did Turkey’s beaten up market in a sign that the selling of stocks did not reach panic levels.

The price of oil has become a significant concern as it continues to fall indicating a slowing global economy. The Commodities index, dominated by oil and oil-related prices, fell -6.6%. Real estate stocks fell with the overall market losing -6.3% for the week but only off -6.8% year-to-date or less than half the overall market’s loss.

The two bright spots where gold and bonds. Gold moved higher by +1.4% for the week but remains down -4.0% year-to-date. This was a relatively small move higher for gold during a week when stocks fell sharply indicating, again, that investors are not panicking and moving into gold as safe-haven investment.

Bonds also were higher on the week by +0.4%. Normally investors would expect bonds to lose value when the Federal Reserve raises interest rates but, instead, investors were selling stocks and buying bonds pushing prices higher. The all-important 10-year U.S. Government Treasury yield ended the week at 2.783% which is a sharp decline since its recent on high on November 8th at 3.238%.

Stock Highlights

Only 6 of the 500 stocks in the S&P 500 were higher this week. These six winners though have been among some of the worst performers year-to-date with an average loss of -30.7%. In addition to being some of the poorer performs this year they are also companies with above average dividend yields at 3.2% as compared to the average S&P 500 company at 2.0%.

Food company General Mills (GIS) was the week’s best performer following its report of better than quarterly earnings. For the most recent quarter sales were higher by +5.0% over last year’s same quarter while earnings per share came in above Wall Street expectations. This is seen as a defensive stock as both sales and earnings tend to hold up better than others during economic slowdowns. In spite of a positive week, year-to-date the stock is down -34.5% and it now sports a dividend yield of 4.6%.

Nike (NKE), the sports apparel giant, saw its stock jump on following its report of a very strong quarter but the stock still closed fractionally down for the week. As the accompany graph illustrates, sales growth had been slowing in 2016 and early 2017 but has since resumed and came in at +10% in the current quarter with earnings well above analyst expectations. The stock did rally on this news but got caught up in the market’s overall selling and closed the week lower by just -0.2%.

Source: S&P Compustat

Conagra Brands (CAG), another food giant, reported quarterly results that were generally in-line with expectations but provided guidance for the full year that were below expectations. This company has struggled with some brands that have fallen out of favor with consumers driving the company to make some acquisitions to fuel growth. The outcome for investors has certainly been questionable with the stock down -25.9% for the week and back to a price it first traded at in 1996!

The accompanying table shows the performance of the 10 largest stocks, based on market value, for the week and year-to-date. For the week these 10 stocks alone lost approximately $380 billion in total market value! The selling was aggressive and widespread with none of these companies having any significant news that explains these drops in price.

Source: S&P Compustat

Economic Indicator - Reported

The housing market continues to weaken but numbers this week did come in better than the pessimistic estimates by economists. Housing starts increased in November by +3.2 over the October number but starts are still down -3.6% compared to the same period last year. In addition to an increase in starts, permits were also higher suggesting the outlook could be good.

Existing home sales came in at 5.32 million homes annually which again wasstronger than the pessimist forecasts. The Northeast and Midwest saw the biggest gains while the West region saw sales decline by -6.3%. Overall the November number is an increase from the October level but, like housing starts, -7.0% below the same period last year.

Durable Goods Orders were higher by +0.8% which was helped by airplane orders which tend to be very volatile. When drilling into the report it is not as strong as orders for core capital goods, things bought by businesses to produce other goods, fell by -0.6% which was the third consecutive monthly decline.

Economic Indicators – Upcoming

It is expected to be a relatively quiet week for economic data. Expected is a read on housing prices, Consumer Confidence, and new home sales.

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