Market Commentary for the week ending November 1st, 2019
- The Federal Reserve cut interest rates by another quarter of a point and signaled a possible pause
- Quarterly earnings have come in stronger than expected for the majority of companies
- Employment growth slows but was better than expected
Market Performance Summary
Notable Market Headlines
The Federal Reserve cut interest rates for the third time this year as was widely expected by investors in an effort to keep the economy from slowing further. Fed Chairman Powell did indicate a likely pause in further cuts as it considers the incoming economic data during the next few months. This rate cut comes as companies are delivering slower earnings growth but numbers that have generally been better than expected and outlooks that are mostly positive.
The result of all this news was record high prices for large U.S. stocks as measured by the S&P 500 gaining +1.5% for the week and now higher by +24.2% in 2019. Also reaching a new record was the tech-heavy NASDAQ Composite up +1.7% for the week. The Dow Jones Industrials though failed to reach a new high by just a fraction of a percent gaining +1.4% for the week.
It’s not been record-setting prices for all stocks as it has for the largest in the market. U.S. small stocks were higher for the week by a very strong +2.0%, better than large stocks, but are still well short of record highs as the accompany graph shows.
International stocks gained ground with the U.S. markets with developed country stocks up +1.5% while emerging markets lagged slightly with a gain of +1.2%. Year-to-date they are higher by +18.2% and +11.5% respectively.
The non-traditional asset classes were all higher on the week as well but did not post the same large gains as stocks. Gold was the best of the three gaining +0.5%, real estate stocks came in second higher by +0.2%, and commodities inched higher by +0.1%. Year-to-date real estate stocks have gained +25.8%, the best performing of all the asset classes we track, but large U.S. stocks are right on their heels.
Bond prices moved higher by +0.5% in reaction to the Federal Reserve’s rate cut leaving the yield on the benchmark 10-year Treasury at 1.716%.
Tiffany & Co. (TIF), a global jeweler with over 300 stores worldwide, received an unsolicited acquisition offer of $14.5 billion or $120 per share from the parent company of fashion brand Louis Vuitton LVMH. The stock was trading below $100 and surged to $129 on this news suggesting investors believe there will be other bidders or LVMH will be forced to raise their offer to get the needed support. Tiffany’s stock was the best performing among the S&P 500 this week up +28.9% and now +57.7% for the year.
General Electric (GE), the industrial conglomerate, is showing signs of health in its quarterly earnings report. Revenue inched higher to $23.36 billion and earnings per share, adjusted for various items, came in better than Wall Street had expected. The key figure though for this company is free cash flow which also came in better than expected and management raised its forecast for the remainder of the year in spite of headwinds from Trade and the Boeing 747 MAX. At the close of the week the stock was higher by +15.3% and is up +42.6% year-to-date. As good as this is, it is still off about two-thirds from its 2016 high.
Kraft Heinz Co. (KHC), the third largest food and beverage manufacturer in North America, reported quarterly results that pleased investors which is contrary to reports earlier this year. Total revenue did fall by -1.6% and was below estimates as demand weakens but earnings per share came in better than expected. The company has been struggling but the CEO said they are beginning to operate the business better and setting their strategic direction. Wall Street was happy for the week with the stock jumping +14.9% but remained lower by -24.2% in 2019.
Arista Networks (ANET), a hardware and software company servicing various clients including data centers, indicated in its earnings report that demand in the hot data center, or cloud, segment is softening. The company’s third quarter numbers were good but management provided updated revenue guidance for the fourth quarter of $540 - $560 million which is about $125 million shy of what Wall Street had been expecting. The stock got hit hard for the week down -24.2%. As the accompanying graph shows the stock had been a darling of investors surging from $50 in 2016 to more than $300 last year.
Economic Indicator - Reported
The October employment report was better than economists expected with the economy adding 128,000 new jobs, versus the estimate of 75,000, combined with the prior months’ reports revised higher by a cumulative 95,000 jobs. Many sectors added jobs while Manufacturing was the weakest losing 36,000. The unemployment rate ticked higher by 0.1% to 3.6% as more people entered the workforce seeking jobs. Wages were also higher for the month by +0.2% leaving them up +3.0% during the past 12 months.
U.S. Gross Domestic Product (GDP) rose by +1.9% with the help of continued consumer spending. Another help was a +5.1% in residential investments fueled by lower mortgage rates but business spending declined due to the uncertainty around trade.
The Consumer Confidence Index was little changed in the most recent month and remains near its multi-year high. The report shows consumers feel good about the current economy but worry some about the future. These worries tend to rise and fall depending on how the outlook for a trade deal with China seems to be progressing.
The Case-Shiller Home Price index for 20 major cities fell -0.2% in August making it the first decline in a year. There is hope and expectation that prices and market activity is stabilizing.
Economic Indicators – Upcoming
The following economic data are expected in the coming week:
- Consumer Sentiment Index
- Factory Orders