Domestic stocks bounced back to record solid gains last week, helping the market regain ground lost over a period of prolonged weakness and bringing most of the major indexes back into positive territory YTD. The smaller-cap benchmarks performed best and broke a streak of six consecutive weekly losses. Within the S&P 500, the materials sector posted the strongest returns, while utilities shares lagged. The large information technology sector also underperformed, held back by a sharp drop in Apple shares on Friday after traders reacted negatively to fourth quarter sales expectations and an announcement that the company would no longer break out sales reports for its smartphones, computers, and tablets. Value stocks outperformed higher-valuation growth shares. The VIX hit a new eight-month high on Monday but declined over much of the rest of the week.
The week trending down, threatening to extend the previous week’s substantial losses. Traders noted that it was difficult to determine a precise catalyst for the selling but that the revenue miss reported by Amazon the previous Thursday seemed to continue dampening overall sentiment. Reports that the White House was preparing to implement tariffs on all remaining Chinese imports if no progress is made at an upcoming meeting between President Trump and Chinese President Xi at the G20 summit in Argentina also weighed on the market. On Thursday, sentiment appeared to get a lift after President Trump tweeted that he had a long conversation with President Xi and that “discussions are moving along nicely.” The U.S. currently has tariffs on $250 billion worth of Chinese imports, a little under half the value of all goods brought in from that country last year.
The market found its footing and reversed course on Tuesday, but the reasons for the rebound seemed murky as well. Traders noted that pension fund purchases to meet month-end asset allocation targets may have been at work. Stock buybacks, which are on track for a record year as companies repatriate cash from overseas to benefit from a lower tax rate, may also have been a factor. The positive momentum carried over through the following two days, helped on Wednesday by a surge in Facebook shares following an earnings beat and an solid outlook from the company’s executives. Semiconductor shares boosted the indexes on Thursday, helped by better-than-expected earnings from NXP Semiconductor. By the end of the week, FactSet had raised its estimate of overall year-over-year earnings growth for the S&P 500 in the third quarter to 24.9 percent — near a multiyear high and almost exactly in line with the pace in the first two quarters of the year.
The market gave back a portion of its gains on Friday, and the culprit may have been an unlikely one — a better-than-expected payrolls report. The Labor Department announced that employers added 250,000 jobs in October, well above consensus estimates, while the 12-month growth in average hourly earnings reached 3.1 percent — not especially impressive when taking account of inflation but a high for the current expansion. While futures rose on the release of the report Friday morning, stocks turned lower later in the day as traders appeared worried about the implications of rising wages on overall inflation and profit margins. The unemployment rate stayed steady at a five-decade low of 3.7 percent. Adding to the market’s weakness on Friday was a denial by National Economic Council director Larry Kudlow that the U.S. was preparing a possible trade deal with China. The strong jobs data helped push up yields on longer-term U.S. Treasury paper, which had already risen earlier in the week alongside equity prices.
European stocks also jumped higher, with the pan-European STOXX Europe 600 Index gaining 3.6 percent last week. However, October was the index’s worst month since January 2016. European equity markets managed to reverse direction in the middle of the week, as a rise in U.S. markets and an apparent easing of global trade tensions fueled a more upbeat mood. Gains by Asia-focused companies and luxury goods sellers helped markets turn around, as did gains in basic resources stocks, which benefited from stronger-than-expected corporate earnings. Germany’s DAX 30, France’s CAC 40, and the UK’s FTSE 100 also finished the week higher, after suffering their worst October declines in several years, buffeted by fears of a global slowdown and trade clashes. Stocks rose for the week despite German Chancellor Angela Merkel’s announcement that she will not run for reelection as chairman of the center-right Christian Democratic Union party in December.
In Asia, China’s main stock market indexes and the yuan rallied on the dissipating fears about the U.S.-China trade war. The Shanghai Composite rose 3.0 percent for the week, while the CSI 300 Index — a gauge of large-cap stocks — added 3.67 percent. On Thursday and Friday, the yuan notched its biggest two-day advance in more than 11 years, after hitting its weakest level in more than a decade versus the U.S. dollar earlier in the week. China’s yuan has been pressured lower in recent months as signs of slowing growth and the trade impasse with the U.S. have weighed on its outlook. Elsewhere in Asia, the Nikkei 225 rallied 5.0 percent last week but is still down 2.3 percent YTD. The gain ended a string of four consecutive weekly losses that trimmed more than 10 percent from the widely watched market yardstick.
Other news and notes follow.
· A Cornell University study suggests that we’re wired to look for ways to earn money, but not so much for ways to save it.
· The U.S. economy just posted one of the best six-month stretches of the past decade. There’s a good chance it’s all downhill from there. Economists surveyed by The Wall Street Journal estimate growth will slow in the coming quarters. The Fed is expecting a lowly 1.8 percent rate by 2021.
· A firebrand ex-army captain swept to victory in Brazil’s presidential election, joining the growing ranks of antiestablishment leaders across the world and shifting Latin America’s largest nation sharply to the right. Meanwhile, Germany’s Angela Merkel won’t seek re-election as chairwoman of her conservative party after 18 years at the helm.
· Traders are selling the shares of firms that hit quarterly earnings expectations at the highest rate since 2011. At Netflix, for example, blow-out earnings sent the share price soaring to $370 per share. However, the stock soon lost more than 15 percent of its value to a point more than 25 percent below the high it set in July.
· The death of the Saudi journalist Jamal Khashoggi has rocked Saudi Arabia’s role as a prominent Arab ally of the West.
· Warren Buffett’s firm invests millions in fintech.
· Percentage of asset classes generating positive returns this year is only 20 percent, a low unseen outside of 1970s stagflation episodes and the Global Financial Crisis; USD cash has been king, with the exceptions of Nasdaq, Commodities and U.S. Leveraged Loans.
· The U.K. government plans to introduce a new “digital services tax” in 2020 that would force big American companies like Google, Amazon and Facebook to pay a tax of 2 percent of their British revenue, which mostly comes from ads. South Korea, India and at least seven other Asian-Pacific countries are also exploring new taxes, The Wall Street Journal reports.
· A combination of higher iPhone prices and strong app-store sales propelled Apple to its best year ever. Revenue in its fiscal fourth quarter, ended September 29, was up nearly 20 percent from a year earlier, while profit soared 32 percent, helped by the U.S. tax overhaul. However, Apple’s revenue guidance for the December quarter — traditionally its most important — disappointed many.
· Thousands of Google workers around the world walked out to protest how the tech giant has handled sexual misconduct by some of its top executives.
· A group of Tesla shareholders, including several U.S. state investment officials, called for sweeping governance changes to enhance board oversight of CEO Elon Musk.
· The forward price/earnings ratio of the MSCI All Country World Index — which tracks performance across 23 developed and 24 emerging markets — fell to around 18 last week, its lowest level since early 2016.
· “Buy the dip” has been a trading staple for years. However, that tactic been absent during the recent slump in global stocks, suggesting a potential shift in market psychology, perhaps due to rising interest rates.
· The eurozone economy had its weakest quarter since it returned to growth in mid-2013. Gross domestic product rose at an annualized rate of 0.6 percent in the three months through September, a slowdown from the 1.8 percent recorded in the second quarter and well below the 3.5 percent registered in the U.S. during the same period.
· The U.S. Treasury Department estimates it will issue more than $1 trillion in debt this year as higher government spending and sluggish tax revenues push the deficit higher. The Treasury said total debt issuance in 2018 would add up to $1.338 trillion, compared with $546 billion in 2017, the highest annual debt issuance since 2010, when the U.S. economy was still crawling out of a recession.
· On November 30, 2001, Jim O’Neill, chief economist at Goldman Sachs, released a white paper declaring a new geo-economic bloc that he said would supplant the current world order. If you were an investor, “BRIC” — Brazil, Russia, India and China — was the way to go, he claimed. Almost exactly 17 years later, the BRICs are indeed emblematic of a very different world, but not the one O’Neill foresaw — one that is autocratic, nationalist and turbulent.
· Global stocks lost more than $5 trillion in value in October, while bond yields rose to their highest levels in years. A brutal October selloff across stock and bond markets has tested investors’ resolve and the durability of the more than nine-year-old bull market. Even after the S&P 500 rallied nearly 3 percent over the final two days of the month, the index in October still notched its most violent pullback in more than seven years, declining 6.9 percent. The tumult left the Dow Jones Industrial Average and the S&P 500 clinging to slim gains YTD. The blue-chip index finished the month down 5.1 percent; the S&P 500 was down nearly 7 percent; the Nasdaq was down 9.2 percent. The so-called FANG stocks — Facebook, Amazon, Netflix, and Alphabet — lost over $400 billion in market value in October. That total marks the group’s largest monthly drop ever going back to Facebook’s 2012 initial public offering, according to Dow Jones Market Data. Shares of IBM fell 24 percent in October, their second-worst month on record. The worst month for the tech company was December 1992, when it dropped 26 percent. IBM tumbled last week after announcing a $33 billion acquisition of Red Hat.
· The Treasury Department is boosting the size of its debt auctions to meet funding needs caused by swelling budget deficits and a shrinking Federal Reserve portfolio. Debt levels are rising at the same time the Federal Reserve is raising interest rates — factors that have led bond yields to rise and prices to fall in recent months. U.S. Treasury paper issuance is testing investor appetite for U.S. government debt, and so far demand for the securities has held up. Companies, on the other hand, are finding it harder to issue new debt, as the volatility battering global stocks adds to existing concerns in credit markets.
· For almost a decade, weak wage growth has defied the economic recovery and has bedeviled workers. However, wages and salaries rose 3.1 percent in the third quarter, the biggest increase in a decade, according to the Labor Department. A good quarter, or even a few good quarters won’t make up for years of stagnation, but this is surely a good start.
· General Motors is offering voluntary buyouts to 18,000 salaried workers; if it doesn’t get enough takers, expect layoffs in early 2019.
· Forty years ago last week, total daily trading volume on the New York Stock Exchange exceeded 50 million for the first time. Nearly 7 billion shares have traded daily on average this year on the NYSE and Nasdaq exchanges.
· President Trump said he is prepared to deploy up to 15,000 troops to the Mexican border in anticipation of a caravan of Central American migrants. That figure, sharply higher than the administration had signaled earlier in the week, caught the Pentagon by surprise (it’s roughly the number of troops deployed in Afghanistan, three times the number in Iraq, and more than the number of participants in the caravan). However, Defense Secretary Jim Mattis rejected criticism that the deployment is motivated by midterm politics.
· According to DB Research, total employment in S&P 500 companies is around 25 million workers. Roughly 17 million of those work in the U.S.; 8 million work abroad. With total nonfarm payrolls in the U.S. at around 150 million people, roughly one out of ten American workers work for S&P 500 companies. In other words, 90 percent of U.S. employment is in small and medium-sized enterprises.
· The S&P 500 had 16 down days in October, the most for any month since 1970 and tied for third worst month since the S&P’s inception in 1928.
· President Trump said he had a “very good conversation” with President Xi Jinping of China, signaling progress in the nations’ trade dispute.
· American factory activity decelerated in October, probably due to tariffs.
· GE shows the risks of investing for the dividend.
· The midterm election is Tuesday; the range of possible outcomes is wide. There have been only two times over the last 21 midterm elections that the party of the incumbent president gained seats in Congress: 1934 and 2002. The President is making his case to buck the trend in rallies around the country.
· The final gauge of the Trump economy before the midterm elections was strong. The U.S. added 250,000 jobs in October, beating the 190,000 consensus jobs estimate from economists, the Labor Department announced on Friday. It was the 97th consecutive month of job growth. The unemployment rate held at 3.7 percent, a nearly 50-year low, while wages grew 3.1 percent year-over-year, the biggest jump since 2009. On the other hand, job strength reinforces the Federal Reserve’s case to raise interest rates one more time this year, despite the President’s objections.