The WMA Weekly Market Wrap v.181023

October 23, 2018

Yo-Yo Markets

The major U.S. stock indexes produced mixed results last week amid continued yo-yo volatility. A solid rally on Tuesday was offset by a Thursday sell-off. Corporate earnings reports were generally positive and helped support equity gains, but global economic and political worries seemed to weigh on the market. Small-cap stocks underperformed the large-cap indexes.

Companies representing about 14 percent of the S&P 500’s market capitalization reported earnings last week. Results from Morgan Stanley and Goldman Sachs in the financials sector surpassed analysts’ estimates and helped drive Tuesday’s 2.15 percent gain in the S&P 500. Technology and related stocks remained under pressure after large sell-offs earlier in the month. Video streaming service Netflix, which was recently moved to the new communication services sector, rallied after announcing better-than-expected subscriber growth but gave back some of the gains later.

Traders noted that a variety of concerns about the global economy seemed to be drawing investors’ attention away from earnings reports. The yuan fell to its weakest level versus the U.S. dollar in two years amid the U.S.-China trade dispute, Italy’s budget impasse with the EU continued, and U.S. relations with Saudi Arabia showed signs of deteriorating over the disappearance of journalist Jamal Khashoggi, raising concerns about the impact on the oil market. Moreover, higher bond yields may be stoking worries about rising corporate borrowing costs.

The release of the minutes from the Federal Reserve’s late-September monetary policy meeting sent U.S. Treasury yields higher, as Fed policymakers indicated that a steady pace of rate hikes is likely to continue. The minutes also showed that Fed officials discussed the prospect of raising rates past the neutral zone and into the “restrictive” zone to slow the economy and reduce the risk of rising inflation. U.S. economic data were generally positive for the week. September industrial production was better than expected, and weekly initial jobless claims remained near historic lows. The yield on the benchmark 10-year U.S. Treasury note increased to about 3.20 percent by the end of last week but remained below the seven-year high reached earlier in the month. The price of Brent crude oil fell below $80 per barrel for the first time in several weeks due to rising U.S. inventories.

Europe’s markets generated mixed performance for the week. After a strong start to earnings season, corporate earnings reports were less uniformly positive later in the week. Stocks came under some selling pressure as Italy’s standoff with the EU intensified. Other developments, such as the increasing likelihood of a “hard” Brexit and a Spanish supreme court decision requiring banks to pay mortgage tax, also weighed on the markets. Nevertheless, the pan-European STOXX Europe 600 Index posted a modest gain for the week.

In Asia, China’s top financial officials spoke out in a rare show of coordinated intervention after the country’s stock market benchmark touched a four-year low, as the escalating trade tensions with the U.S. and evidence of slowing domestic growth unnerved traders. The Shanghai Composite ended at its lowest level since November 2014 on Thursday, while the CSI 300 Index — a gauge of large-cap stocks — closed at its lowest level since March 2016. Although the Shanghai Composite surged 2.6 percent on Friday, reportedly on state buying, the benchmark still fell for the week. The yuan touched its weakest level in almost two years on Thursday, renewing speculation that the currency would soon break the psychologically key threshold of 7 yuan per U.S. dollar. Japanese stocks also posted losses last week.

Other news and notes follow:

·     Sears files for bankruptcy protection.

·     The U.S. budget deficit grew to $779 billion in Donald Trump’s first full fiscal year as president, the highest since 2012 amid tax cuts and spending increases. The budget gap for the 12 months through September was 17 percent wider than the same 12-month period a year earlier, as spending rose 3.2 percent and revenue gained just 0.4 percent, according to a Treasury Department report released Monday. The deficit as a share of total economic output was 3.9 percent in fiscal 2018, up 0.4 percentage point from the prior year. The government’s fiscal year runs from October 1 to September 30.

·     Despite the debt and deficit problems, Washington isn’t inclined to act on them.

·     Over a third of fund managers expect global growth to decelerate in the next year — the most pessimistic outlook since November 2008, according to a monthly survey by Bank of America Merrill Lynch. Meanwhile, a record 85 percent of investors believe that growth worldwide is in the “late” stages of an economic cycle, although it’s unclear how long the stages might last.

·     President Trump again said the Federal Reserve is raising short-term interest rates too fast, calling the U.S. central bank “my biggest threat.”

·     U.S. manufacturers increased their capacity for the 16th straight month in September, fresh evidence that a strengthening economy is helping to propel a U.S. industrial rebound. The latest data suggest investment in U.S. manufacturing has been increasing at a steady pace over the past three years. In June it passed its 2008 peak.

·     American employers had more than seven million unfilled jobs for the first time on record this summer.

·     According to Fortune, when the first Fortune 500 was published in 1955, ninety percent of the companies on the list was first published in 1955 are now gone, having either gone out of business or been acquired.

·     The deepening selloff in emerging markets this year is one of the biggest of the past decade — and differs in ways that highlight how the developing world has changed.

·     In City Journal, the late Stefan Kanfer writes about the evolution of American retail: “Credit Suisse recently predicted that by 2022, some 25 percent of U.S. shopping malls will fold. And this may underestimate the trend. Ron Friedman, a retail specialist at the advisory firm Marcus, indicates that the situation could be ‘more in the 30 percent range. There are a lot of malls that know they’re in big trouble.’”

·     Since the start of October, technology stocks have fallen more than 6 percent. They were the best performers among the S&P 500’s 11 sectors last year, rising more than 35 percent, and were up 20 percent heading into the fourth quarter.

·     The Dow Jones Transportation Average, which includes 20 large companies ranging from truckers, logistics operators and shipping companies, has shed 9.3 percent over the past four weeks.

·     The divergence between U.S. stocks, which have powered to records, and most of the world’s markets, which have crumbled, is no more. The factors that helped U.S. stocks to outperform other global equity markets this year faded sharply over the past couple of weeks before recovering somewhat. Meanwhile, shares of small, U.S.-focused companies have been suffering their worst rout in years, resulting in an unusual situation where large and small caps are falling in tandem.

·     Netflix’s subscribers went up and so did its stock.

·     The Federal Reserve has raised interest rates eight times since late 2015. President Trump doesn’t like it but broad trends show the increases haven’t derailed the economy: consumer spending is strong, job creation solid and there’s been a recent pickup in growth for the second-longest U.S. expansion on record. However, higher rates aren’t without consequences. Tighter Fed policy is weighing on interest-sensitive spending such as housing and autos.

·     Fed minutes released last week pointed to continued, gradual interest-rate increases. Federal Reserve officials signaled that they see a strong economy justifying continued interest-rate increases, minutes from their September policy meeting showed.

·     President Trump, spelling out his closing arguments for the final days of midterm campaigning, told a rally in Montana last week: “This will be an election of Kavanaugh, the caravan, law and order, and common sense.”

·     The U.S. Treasury again declined to designate China a “currency manipulator,” but singled out the nation’s practices as a source of “particular concern.” Treasury Secretary Steven Mnuchin said China’s lack of currency transparency and the recent weakness in the yuan pose major challenges to achieving fairer and more balanced trade.

Remember October 10? It was a big day in the markets. The S&P 500 imploded, falling as much as 7.7 percent intraday. Of course, I’m referring to October 10, 2008, when the S&P closed at 899. It’s helpful to consider forward returns from that date.

·     One day later, the market was up 11.5 percent

·     One week later, it was up 4.6 percent

·     One month later, it was up 2.2 percent

·     Five months later, it was down 20 percent

·     Six months later, it was down 4.7 percent

·     One year later, it was up 19 percent

·     Five years later, it was up 88 percent

·     Ten years later minus one day, it was up 320 percent

·     Ten years later, after the S&P fell 3.3 percent in one day, it was still up 310 percent on the decade

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