The WMA Weekly Market Wrap v.181016

October 16, 2018

Losses Intensify

The previous week’s losses intensified last week as domestic stocks fell sharply, with the S&P 500 losing more than 5 percent Wednesday-Thursday, its largest two-day drop since early February. The smaller-cap indexes suffered the biggest declines, pushing the S&P MidCap 400 into negative territory YTD and the small-cap Russell 2000 into correction territory, off more than 10 percent from its recent highs. The VIX spiked and hit its highest level since late March on Thursday, while trading volumes reached their highest level in over eight months. Industrials and materials stocks performed worst within the S&P 500, while utilities stocks fared best. High-valuation growth stocks underperformed slower-growing value shares for much of the week but regained some ground on Friday. Earnings season began positively on Friday and stocks broadly regained some ground, but not as much as might be expected.

Rising U.S. Treasury paper yields, the deepening U.S. trade conflict with China, signs of weakness in the global economy, and other concerns continued to weigh on sentiment during the week, but precisely why everything went south on Wednesday morning remains unclear. The first spark may have been a relatively minor item — a report that China was cracking down on traveling citizens bringing undeclared designer handbags and other goods into the country – which led to a tumble in the shares of luxury goods makers. This was soon followed by news of a rebound in U.S. producer prices in September, which, despite being widely expected, appeared to raise fears about a jump in consumer inflation.

Technical factors came into play later in the day Wednesday, particularly after the S&P 500 fell below its 100-day moving average and seemed to accelerate program-based selling. Selling out of stocks as an asset class rather than trading out of individual shares also appeared to play a role, with ETFs responsible for over one-third of trading volumes.

After some hopeful signs at the opening, selling resumed Thursday, taking the S&P 500, the Dow, and the Nasdaq all below their 200-day moving averages. Once again, systematic selling appeared to be at work, and ETF trading increased to 42 percent of total volumes. Thursday brought some good news about inflation, but it seemed to do little to improve sentiment. Consumer price inflation unexpectedly moderated in September, reaching its lowest year-over-year rate (2.3 percent) since February. The sell-off in equities seemed to push some into the bond market, and longer-term bond yields decreased for the week.

European equities mirrored the broader market and moved lower, as some worried that rising interest rates would curb global growth. The STOXX Europe 600 Index was down about 5 percent for the week, hitting new 52-week lows. Luxury brands were heavily sold amid concerns of weaker-than-expected Chinese growth and new Chinese customs restrictions. Italy’s FTSE MIB Index was down 5 percent for the week and fell into bear market territory — a decline of at least 20 percent from a recent high. Germany’s DAX 30 and France’s CAC 40 also lost about 5 percent. The UK’s FTSE 100 dropped 4.4 percent and entered correction territory, generally defined as a drop of at least 10 percent from a recent peak.

Asian stocks also posted steep losses last week. China decreased the amount of money that commercial banks must put aside at the country’s central bank, a significant move that could release an extra $175 billion into the economy, as Beijing steps up measures to support growth amid a worsening trade war with the U.S.

Other news and notes follow.

·     Congratulations to William Nordhaus and Paul Romer, winners of this year’s Nobel Prize in economics. Nordhaus built models to measure the impacts of climate change on the economy and the costs of addressing it. Romer examined how ideas and knowledge fuel economic growth, and how to foster environments in which knowledge and growth can flourish.

·     Time magazine asked its global network of editors and correspondents to nominate “Genius Companies,” with winners chosen based on originality, influence, success and ambition.

·     The best-performing sector of the American stock market this year, bar energy, has been the consumer discretionary category — the companies that sell the things we like to buy but don’t have to buy, like Amazon and Netflix, which each have over 100 million paying subscribers. Moreover, while the broad stock market is up a very impressive 332 percent from its 2009 lows, consumer discretionary stocks are up a stunning 630 percent.

·     The U.S. consumer overwhelmingly shops at real, physical stores. For all the talk of Amazon’s domination, only 10 percent of US retail sales are made over the internet.The death of shopping malls is exaggerated, too. They are currently 94 percent occupied, according to CBRE. According to the International Council of Shopping Centers, America has 24 square feet of shopping center space per person, compared to 17 square feet in Canada, 11 square feet in Australia and less than 5 square feet in the U.K.

·     “A landmark report from the United Nations’ scientific panel on climate change paints a far more dire picture of the immediate consequences of climate change than previously thought,” The New York Times reports.

·     “Jair Bolsonaro, the divisive, far-right former Army captain, stormed to a huge lead in the first round of Brazil’s presidential elections … as voters enraged by years of recession, corruption scandals and soaring crime rallied around his strongman message,” per Bloomberg.

·     Private-equity firms are on track to raise a record amount for infrastructure investing in 2018. Private-equity firms collectively raised $68.2 billion for infrastructure investment in the first three quarters, 18% more than in the year-earlier period and $2 billion more than in all of 2016, according to Preqin.

·     Last week ushered in third-quarter earnings season: JPMorgan, Citigroup and Wells Fargo announced on Friday morning, with all beating expectations.

·     As the rest of Wall Street cuts all kinds of fees in a race to zero, advisers have been the exception. That is starting to change.

·     Polls suggest the fight over the confirmation of new Supreme Court Justice Brett Kavanaugh likely improves Republicans’ chances of keeping control of the Senate but hurts their chances of keeping control of the House.

·     A convertible bond is a bond that can be converted, at the option of the holder, into stock of the issuer. Some analyze convertible bonds as odd bonds. But in many cases — particularly the weirder cases, which are abundant in convertibles — they are best analyzed as weird stocks.

·     Sovereign wealth funds embrace their growing ambitions.

·     The VIX curve inverted.

·     The deck is significantly stacked in favor of those who can keep working past 65, the AP notes. While the college educated are putting off retirement to enjoy heftier investment accounts, Americans without degrees are retiring early amid worsening health outcomes, in part due to physically demanding jobs. Delaying retirement dramatically increases one’s Social Security entitlement, too.

·     The S&P 500 Index’s sectors were rebalanced last month such that the small Telecoms sector was expanded into a more robust Communications Services sector, with some companies in the Consumer Discretionary and Information Technology sectors being moved into Communications Services. Facebook, Apple and Alphabet left the tech sector, which lost about 21 percent of its market capitalization, to join communications. State Street’s $22.8 billion Technology Select Sector SPDR ETF (XLK) liquidated its holdings of Facebook, Twitter and Alphabet two weeks ago, while the $22.6 billion Vanguard Information Technology ETF (VGT) sold off the shares gradually over several months. Yet the two ETFs combined have seen just $4.3 billion in outflows, less than 10 percent of their combined assets, since the S&P 500 changes were implemented. The new Communications Services Select Sector SPDR ETF (XLC), which launched in June to give investors time to shift to the new sector, has picked up almost $2 billion in new assets since the start of the month, making it one of the most successful fund launches of the year. That means that there was about $45 billion in those two tech ETFs, they had to sell off about $9.5 billion of stock when the tech sector shrank by 21 percent, and then they only had to return about $4.3 billion of that money to investors (which the investors then could put into communications ETFs). The remaining $5.2 billion, presumably, was plowed back into the remaining Information Technology companies, which became more valuable solely because (1) Alphabet and Facebook left their sector and (2) investors didn’t.

·     Over the last 6 years, U.S. bonds (as represented by the Barclays Aggregate Bond Index) have returned 1.3 percent per year, their lowest six-year annualized return in history.

·     Men who retire earlier tend to die younger, but not women, according to the Center for Economic Policy Research.

·     Three excellent researchers present a retirement spending strategy focused on delaying Social Security and getting the most out of RMDs.

·     Lobbyists say they encourage clients to advertise on Fox News programs the president is known to watch, in the belief that Mr. Trump can be swayed by what he sees on television.

·     Data from Gallup shows that confidence in media as an institution is at an all-time low, and both the media and the current political climate are probably to blame.

·     The IMF lowered its forecasts for global economic growth this year and next, citing rising trade protectionism and instability in emerging markets. The IMF said the global economy will expand 3.7 percent this year, down from its April estimate of 3.9 percent. The IMF expects U.S. growth will be 2.9 percent this year, unchanged from its earlier forecasts, meaning that European and emerging-market economies are providing the drag.

·     Half the world is now middle class or wealthier. Therefore, for the first time since civilization began, most of humankind is no longer poor or vulnerable to falling into poverty.

·     Google permanently shut down the consumer version of Google+ yesterday after The Wall Street Journal reported that Google exposed the data of roughly 500,000 Google+ users this past spring, but didn’t disclose the breach.

·     Venezuela’s annual inflation hits 488,865 percent.

·     Ford is preparing for massive layoffs – 12 percent of the workforce; 24,000 jobs – on account of the trade wars, have lost over a billion dollars.

·     At least six deaths have been attributed to Hurricane Michael,which blasted a swath of destruction across several states.

·     After languishing for most of the year, gold prices notched their biggest daily gain since June 2016 on Thursday, climbing 2.9 percent as global stocks extended their losses.

·     Fed funds futures, which investors use to bet on the path of central bank interest-rate policy, showed the odds of policy makers raising rates three times by June 2019 declined to 33 percent from 41 percent late Wednesday. The odds of an increase in December slipped to 78 percent from 83 percent Wednesday.

·     Last week, President Trump continued to vent his unhappiness with the Federal Reserve’s short-term rate increases, calling them “out of control.” However, other administration officials aren’t piling on (at least so far). After Mr. Trump first criticized the Fed this summer, Treasury Secretary Steven Mnuchin said he was “thrilled” with Chairman Jerome Powell and called him a “phenomenal leader.” On Thursday, White House adviser Lawrence Kudlow played down the latest criticism. “The president is not dictating policy to the Fed,” he said on CNBC. Later, Mr. Kudlow added: “And by the way, I think Jay Powell is on target.”

·     Even though they aren’t high by historic standards, mortgage rates hit their highest level in more than seven years this week at nearly 5 percent, a potential blow for an already sluggish housing market.

·     After years of pinched budgets, seniors may get some relief in January when monthly Social Security benefits increase by 2.8 percent.

·     On Thursday, the S&P 500 experienced its twentieth -3 percent day since the bear market ended in 2009. The Nasdaq experienced its eighth -4 percent day. The selling over the last five sessions has been brutal in many cases, with winners and losers alike getting sold. Facebook and Netflix (which was still up 68 percent YTD) hit bear market territory. Google is not far behind. It might not feel like it, and I know it doesn’t make the volatility hurt any less, but the S&P 500 is back where it was in July and is still up 5 percent (TR) this year. So, if you were nervous during the sell-off, maybe you’re taking too much risk, and if you weren’t nervous, maybe you could afford to take a little bit more.

·     3Q18 earnings are perhaps the most meaningful earnings period in at least 10 years. Results are expecting to increase by a whopping 20 percent, but the market may be expecting more. Moreover, for the first time in at least five years technology results are expected to increase less than broader market.

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