The WMA Weekly Market Wrap v.181030

October 30, 2018

Whirlwind Week

Domestic stocks suffered another week of sharp declines. The S&P 500 lost 3.9 percent; the Nasdaq dropped 3.8 percent; and the Dow shed 3 percent. The S&P 500 and the Nasdaq joined the small-cap benchmarks in correction territory — down more than 10 percent from recent peaks — on Friday morning. The narrowly focused Dow avoided a correction level and held up best for the week, but the Nasdaq was the sole major benchmark to end Friday still up YTD. Within the S&P 500, the defensive consumer staples, utilities, and real estate sectors performed best, if still poorly, while energy shares suffered the largest declines. Trading volumes were elevated for much of the week, and the VIX reached a new multi-month high.

In dollar terms, U.S. stocks lost $1.2 trillion last week and have lost $3.3 trillion in equity value over the past five weeks, according to Wilshire Associates.

The week was the busiest one of the quarterly earnings season, with 37 percent of the companies in the S&P 500 reporting results. Positive earnings and revenue surprises drove gains in McDonald’s, Ford Motor, and Tesla, but these were more than offset in the broad indexes by declines in heavily weighted Amazon and Google parent Alphabet. The two stocks fell sharply on Friday after the companies reported a slowdown in revenue growth in the third quarter, although earnings for both companies were solid and exceeded forecasts. As of the end of the week, analysts polled by FactSet expected earnings for the S&P 500 as a whole to have increased by nearly 23 percent from a year before, only a modest slowdown from 25 percent gains in the first two quarters of the year (and 23 percent is robust growth by any measure).

A slump in technology and internet stocks accelerated Friday, as traders continued an October retreat from risky assets. The Nasdaq is down 11 percent so far in October, while the Dow and the S&P 500 turned negative for the year and narrowly avoided their worst weeks since March following severe declines two weeks ago. The Nasdaq posted its largest one-week fall since late March. The whirlwind week was marked by intraday dips and sharp rebounds. Worries about corporate revenue peaking and whether a slowdown in China and Europe could spill over into the U.S. economy have kept stocks in a tailspin – equities have declined 14 of the past 17 days, the sort of streak seen only once since 2000. Of the five worst sessions since 2015, two have come in the last two weeks.

Shares of Amazon slumped to near bear market territory (generally characterized by a decline of at least 20 percent from a recent high) and Alphabet fell too. Facebook, Netflix, and Apple (which reports earnings next week), also dropped. With Amazon’s drop, the company’s market value fell to roughly $800 billion, putting it behind Microsoft as now the third-largest U.S. company behind Apple. After Amazon hit a $1 trillion market cap early last month, some anticipated it might soon overtake Apple as the world’s largest publicly traded company. But traders say weaker-than-expected revenue has stoked fears about softening global demand. This month’s selloff in the so-called FANG stocks — Facebook, Amazon, Netflix and Google parent Alphabet — has taken more than $300 billion off the group’s market value, according to Dow Jones Market Data. The Nasdaq has lost more than $1 trillion this month.

Lackluster results and forecasts at a wide swath of companies are impacting stocks. Weak reports from Caterpillar and 3M battered major indexes Tuesday, while poor sales targets from chip maker Texas Instruments hurt not only that company but the semiconductor group. Nearly half the S&P 500 has posted results, and nearly 60 percent of those companies have exceeded sales expectations, compared to the one-year average of 73 percent, according to FactSet.

Concerns about the health of the global economy appeared to amplify disappointments in individual company earnings throughout the week, particularly as traders looked for signs of the impact of tariffs on overseas sales and input costs. Worries about the impact of U.S. tariffs on the Chinese economy and signs of slowing growth in Europe also seemed to dampen sentiment. The unsettled geopolitical environment may have further contributed to worries. Continuing revelations about the death of Saudi journalist Jamal Khashoggi and President Trump’s threat to withdraw from a nuclear arms treaty with Russia seemed to keep many unnerved.

U.S. economic data released during the week offered mixed evidence about whether a slowdown might be coming. Durable goods orders rose modestly in September but declined when excluding orders for defense aircraft. A gauge of midwestern manufacturing activity also fell to its lowest level in two years. Pending home sales rose unexpectedly in the month, but completed sales of new homes (with the signing of a sales contract or the acceptance of a deposit) declined sharply.

On Friday, the Commerce Department reported its initial estimate that gross domestic product expanded at an annualized rate of 3.5 percent in the third quarter, slightly above consensus estimates and well above the 2.0–2.5 percent trend in recent years. The underlying data show consumer spending increasing at a healthy pace but due, in part, to a decline in the savings rate. Increased government spending also contributed. A dark spot in the report was a sharp slowdown in the growth in business capital expenditures, and more current data offer little evidence of a snapback. Improved business investment was a central goal of last year’s tax reform law and will be key to improving productivity and accelerating U.S. economic growth over the longer term.

The lackluster economic data and equity market volatility boosted demand for U.S. Treasury paper and sent the yield on the benchmark 10-year U.S. Treasury note sharply lower for the week. Rather than going through the entrails of earnings, which appear to be more of an excuse than a reason to sell stocks, look instead at the tightening of financial conditions. Bond yields remain on the rise, bringing long-term real yields back above one percent, a level not seen since 2011. Less availability of credit, declining share prices, or tighter lending standards can all have a negative impact on financial activity. Perhaps most pertinently, a stronger currency also tightens conditions, and the dollar is still strengthening – a problem for U.S. exporters and for countries that have borrowed in dollars. If we use Goldman’s widely cited U.S. financial conditions index, we see a steep rise last week, bringing it back to levels not seen since early last year.

Stocks in Europe fell throughout the week in line with U.S. markets, if not as steeply, and as Italy’s budget row with the EU grew more heated. The pan-European STOXX 600 Index fell more than 2 percent, and indexes in Germany, Italy, and the UK all lost ground. France’s CAC 40 lost 2.4 percent, led by a decline in auto-parts maker Valeo, which cut its sales and earnings targets, adding to concern that the trade spats with the U.S. are affecting businesses.

In Asia, China’s main stock market indexes posted a weekly gain (in contrast to almost everywhere else), but the yuan flirted with a 10-year low against the U.S. dollar on Friday, as trade tensions stoked bearish bets against the currency. The Shanghai Composite Index added 1.9 percent for the week, while the CSI 300 Index — a gauge of large-cap stocks — ended up 1.2 percent. The latest gains came one week after the Shanghai and the CSI 300 sank to their lowest levels in four years and two years, respectively, amid signs of slowing domestic growth and the trade impasse with the U.S. Moreover, the Shanghai is still off roughly 27 percent since its January high. Meanwhile, the yuan extended its recent decline, reviving fears that more weakness will spark large capital outflows that could destabilize China’s economy.

In Japan, the Nikkei 225 Stock Average fell heavily on both Monday and Thursday to close the week 6 percent lower and down 6.9 percent YTD. The broad-based TOPIX Index and the TOPIX Small Index also tumbled for the week, putting their YTD returns at -12.2 percent and -16.0 percent, respectively. South Korea’s Kospi also dropped 6 percent.

Other news and notes follow.

·     Last week’s difficulties came while the dollar staged a rebound. The currency’s downtrend last year, even as the Federal Reserve raised interest rates and began shrinking its balance sheet assets, helped virtually everyone. It boosted U.S. corporate profits, eased financial conditions a little and took some pressure off emerging market assets. Now, the Bloomberg Dollar Spot Index that compares the greenback to 10 major peers has broken out to its highest level since July 2017.

·     The most recent U.S. government fiscal year just ended. The budget deficit grew by 17 percent from the previous year, largely due to tax reform.

·     Free isn’t necessarily cheap. Back in 2009, free was a radical idea, extolled in books by the likes of Wired editor Chris Anderson. Today, it’s inherently suspect, on the grounds that if you’re not paying, you’re the product being sold.

·     It’s a small sample size, but it’s fairly uncommon for stocks to be down in October of a midterm election year (only 4/17 since 1950). In those four midterm years, November and December were positive each time and the S&P 500 averaged 9.04 percent through the end of the year

·     Percentage of households that shopped at these retailers within the past four weeks:

·     Walmart: 66.6 percent

·     Amazon: 66.1 percent

·     Target: 32.5 percent

·     Tax reform’s elimination of state and local tax deduction combined with higher mortgage rates have combined to crush the housing market in the Northeast.

·     The world’s longest sea bridge opened on Tuesday, snaking 34 miles across China’s Pearl River estuary to form a pillar of Beijing’s plan to merge 11 cities in its southern region into one megalopolis. At 20 times the length of California’s Golden Gate Bridge, the six-lane crossing will link a regional economic zone of 70 million people, with a combined annual GDP of $1.51 trillion — almost twice that of the San Francisco Bay Area, and larger than the national economies of Australia, Spain or Mexico.

·     U.S. spending on infrastructure, meanwhile, hit its high-water mark in 2003. Yes, the Trump administration and congressional Democrats bemoan America’s decrepit roads, bridges and airports, and have promised to spend money aggressively to fix them. But they haven’t.

·     After nearly three years of rate increases from the Federal Reserve, customers are pulling billions of dollars out of accounts that don’t earn interest.

·     A new Labor Department rule would ease small firms’ path to joint 401(k) plans. The change would make it easier for small businesses to offer 401(k) plans, part of an effort to close a retirement-plan coverage gap that affects millions of employees.

·     There’s a high price to be paid for our short attention spans. We’re bombarded with information, giving us little time to focus on any of it. It’s a recipe for making bad choices about money.

·     Cliff Asness on The George Costanza Portfolio.

·     BlackRock stakes claim on “sustainable investing” revolution.

·     Of the 201 men to lose major jobs as a result of #MeToo, 43 percent of their replacements have been women, The New York Times reports in a stunning data visual.

·     The global economy may be running out of momentum

·     President Trump escalated his attacks on Federal Reserve Chairman Jerome Powell last week, blaming him for threatening U.S. economic growth and saying he appeared to enjoy raising interest rates.

·     “We apply acoustical analysis to the daily top ten of music downloads in iTunes for Germany to derive a novel and direct measure for mood. We match this novel mood index with trading data of German individual investors. We find that when mood is positive, investors purchase more, particularly trading into risky and out of less-risky securities,” Dimitrios Kostopoulos and Steffen Meyer write in the Journal of Economic Behavior and Organization.

·     New York’s attorney general filed a lawsuit against ExxonMobil, claiming the company defrauded shareholders by downplaying the expected risk of climate change to its business.

·     TD Ameritrade announced last week that it is the first brokerage firm to allow clients to buy stocks using Alexa. However, trading via Alexa is actually a complicated 10-step process (not including the one-time setup).

·     From a valuation perspective, either U.S. stocks are relatively cheap, or the consensus earnings forecasts are way too optimistic. The S&P 500 forward price-to-earnings ratio is now at the lows of 2016 when the world was worried about deflation and negative interest rates.

·     Pipe bombs sent to prominent Democrats were a wired manifestation of the toxic trajectory of American politics, with President Trump, Democrats, and the media all blaming each other for the worst terror-by-mail campaign of the post-9/11 era. A suspect is in custody.

·     The U.S. is refusing to resume trade negotiations with China until Beijing comes up with a concrete proposal to address Washington’s complaints about forced technology transfers and other economic issues. Negotiations have been on hold since mid-September, but the Chinese have sought to re-engage ahead of a planned meeting between the two countries’ presidents in November.

·     Netflix announced it beat investor expectations on earnings, revenue and user growth. Google’s parent company made $33.7 billion in revenue in Q3, up 21 percent year over year, with modest growth in revenue outside ads. Amazon reported $56.6 billion in revenue for the quarter, missing projections by half a billion. Traders found reason to be a bit disappointed. Intel raised its full-year sales targets after exceeding expectations in the third quarter.

·     Barring a political miracle, most believe that far-right provocateur Jair Bolsonaro will win Brazil’s presidency in today’s runoff election and bring an end to 15 years of leftist rule.

·     College-educated women in the U.S. make 90 percent as much as their male counterparts at 25. But, by 45, they make only 55 percent as much.

·     Investors see signs of economic trouble ahead.

·     The Nasdaq has moved at least 2 percent in a day seven times so far this month, the most since January 2016 and most for any October since 2011, according to Dow Jones Market Data.

·     Hedge funds tout their ability to do well during periods of market stress. But many aren’t doing well during the current October market struggles.

·     Jeremy Grantham explains why his “melt-up” prediction failed.

·     U.S. gross domestic product rose at a seasonally and inflation-adjusted annual rate of 3.5 percent in the third quarter, a rate slightly better than anticipated.

·     On Wednesday, Super Typhoon Yutu became the strongest tropical cyclone to hit U.S. soil since 1935. Its cloud-free eye enveloped the tiny island of Tinian in the U.S. Commonwealth of the Northern Mariana Islands, making for an eerie sight from space. The high-end Category 5 storm contained maximum sustained winds of at least 180 mph. The U.S. has now been hit by a whopping five Category 4 or 5 tropical cyclones in a little over a year.

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