Here’s an interesting opening salvo before we get to the news. If you are troubled by recent volatility, remember this. The percent of days with one percent market moves in the Nasdaq follow.
2017: 10 percent of days
2018: 36 percent of days
The median for all calendar years from 1986-2017 is 36 percent. That makes 2017’s smooth ride the outlier.
Domestic stocks traded mostly higher last week but gave back some of their gains to close out the period. The large-cap indexes outperformed the tech-heavy Nasdaq and the smaller-cap benchmarks, while value outpaced growth. Within the S&P 500, healthcare outperformed. Provider and insurer shares rose on Wednesday after the Democrats won a majority of seats in the House of Representatives, seemingly assuring a continuation of subsidies under the Affordable Care Act. Communication services stocks performed worst, held down by late declines in Netflix and video game stocks. Energy stocks were also weak, dragged lower by a sharp decline in oil prices.
The midterm elections on Tuesday dominated sentiment throughout the first half of the week. Stocks recorded modest gains on Monday and Tuesday, as polls suggested that Democrats would take the House and that Republicans would retain control of the Senate. Stocks surged on Wednesday after those results were confirmed, with the S&P 500 recording its third-best daily gain over the past year. Trading volumes during Wednesday’s rally were weak, however. The prospect of legislative gridlock seemed to be a welcome one, even for equities, and many may have focused on a historical pattern of gains following the midterms — stocks have rallied after every midterm election since 1946. However, there is no reason to think that result is somehow guaranteed.
Historically and generally, political gridlock is bad for stocks, good for bonds. It makes intuitive sense in that an opposition Congress will typically try to thwart the President from doing things that make voters happy, such as borrowing and spending money – which is usually good for stocks (as in 2017). On the other hand, the bond market is generally happy when borrowing is contained.
The week’s economic data were mixed. The Institute for Supply Management’s measure of service sector activity, reported Monday, declined less than expected in October and remained just below the record peak (since the Institute began collecting data in 2008) that was reached in September. Weekly jobless claims stayed near multi-decade lows, and the University of Michigan’s gauge of consumer sentiment rose a bit. More concerning was a jump in producer price inflation, with much of the inflationary pressure coming from wholesalers and retailers.
Meanwhile, a continued slide in oil prices led some to wonder whether global demand was slowing, calling into question the overall health of the global economy. In the U.S., traders also worried about a continuing rise in oil inventories, and the price of a barrel of domestic benchmark West Texas Intermediate crude fell into bear market territory — down over 20 percent from a four-year high of about $76 in early October. By the end of the week, crude had fallen back to around $60 per barrel, its lowest level in eight months. The mixed economic data and the lack of surprise in the election outcome kept longer-term U.S. Treasury yields roughly unchanged for the week.
Overseas, the European STOXX 600 index was relatively flat for the week, pressured by fears of rising U.S. interest rates, disappointing earnings, worries about Italy’s growing rift with the European Union, and continued signs that trade tensions are hurting economies throughout the region. In Asia, China reported a surprisingly large increase in October exports, underscoring strong global demand for the country’s goods despite the imposition of U.S. tariffs. Meanwhile, the Nikkei 225 was nearly unchanged for the week.
Other news and notes follow:
· Berkshire Hathaway repurchased $928 million of its stock in the third quarter. This rare move suggests that Warren Buffett doesn’t see many appealing investment options for his company’s large pile of cash.
· U.S. bond exchange-traded funds saw outflows of around $3 billion in October, or 0.6 percent of assets under management, the first monthly outflow since 2015, according to JPMorgan.
· Predicting the next bear market, in six charts.
· As noted last week, U.S. employers added 250,000 jobs in October, the unemployment rate held at a 49-year low of 3.7 percent, and wages grew at the strongest pace in nearly a decade in October. Federal Reserve Chairman Jerome Powell doesn’t expect the good times to end any time soon.
· Worry of waning retirement income is behind many annuity purchases.
· 2019 401(k), IRA contribution limits raised.
· Are you recommending the “riskiest” of products?
· UBS asked investors with assets of $1 million or more how they are feeling about the markets and political momentum.
· Companies that exceed earnings expectations are performing worse than they have historically, FactSet data show, posing a further dilemma for analysts hoping to remain focused on market fundamentals.
· After capturing half of all U.S. online holiday sales last year, Amazon is now plotting how it can lure even more customers in what’s expected to be a $720 billion shopping bonanza this holiday season. One way it is doing that is by offering free shipping, including for non-Prime members. Amazon will waive the $25 minimum purchase that its non-Prime members must meet for free shipping, at least through the holiday busy season. According to Moody’s analyst Charlie O’Shea, “Amazon’s primary advantage continues to be a profit-agnostic shareholder base, which allows it to invest in virtually any area, at almost any cost, with no negative impact on its share price. This is an advantage that no other retailer enjoys.”
· A number of fast-food and casual-dining restaurants around the country are seeking out senior citizens, who employers say are more sociable and punctual than teenagers.
· Suppose an investor’s portfolio missed the top 20 percent of profitable stocks between 1989 and 2015 and, instead, invested in only the other 80 percent. Total return: 0 percent.
· The outcome of the FOMC meeting was as largely as expected; rates remained unchanged. The Fed is on course to increase rates in December as strong economic growth, higher tariffs and rising wages look set to spur inflation. The Fed stated that “economic activity has been rising at a strong rate” and job gains “have been strong” while repeating its outlook for “further gradual” rate increases. Risks to the outlook appear “roughly balanced” while inflationary expected were described as “little changed on balance.” Fed officials will update their forecasts in December, having already penciled in three increases in 2019 which would put the main rate roughly at levels that policymakers see as neither boosting nor restraining the economy.
· The S&P 500 is trading near its lowest average valuation of the year. The broad index is currently trading at 16 times forward earnings, down from 17 times at the end of the September, according to FactSet.
· Last year’s tax cut was supposed to spur a wave of spending by consumers and companies that would boost demand, rekindle productivity and set the economy on a higher growth trajectory. So far consumers have held up their part of the bargain. But businesses? Not so much.
· According to the Associated Press, “In a harbinger of potentially big changes for Medicare, seniors in many states will be able to get additional services such as help with chores, safety devices and respite for caregivers next year through private ‘Medicare Advantage’ insurance plans.”