Thankfully, another tough week is over
The markets had another difficult week. Before we get to the details of what happened and what it might mean, let’s again begin with a slight detour.
Last week brought Thanksgiving and most of us have much to be thankful for, irrespective of recent market performance. However, some perspective is in order. The average Thanksgiving turkey weighs 15 pounds. At the customary cooking time of 20 minutes per pound, that means an average cooking time of about five hours. In my experience, most people check on the turkey and baste it about every half hour. Assuming an average retirement investing time period of 40 years, if we checked our portfolios every month, it would be like basting a turkey every 40 seconds. Therefore, if you really are the long-term investor most of us claim to be, and even if we grant that it might make sense to check on one’s retirement savings comparatively more than one might check on a turkey, does it make sense to obsess over short-term market performance (days/weeks/months), watch market television, and follow the markets hourly, daily, or even weekly?
I don’t think so either. But perhaps you need a more specific example.
Apple stock is now in bear market territory, meaning it is down 20 percent from its recent high. Despite the current downturn, over the last 15 years, owners of APPL shares have earned 13,084 percent — that’s 38.79 percent annualized. Significantly, one out of every four days of those 15 years, APPL was suffering a drawdown of at least 20 percent. APPL was also experiencing a drawdown of at least five percent fully 61 percent of the time. Long-term investors in Apple have had to endure a very rocky ride…but they have been rewarded handsomely for doing so.
And now the news. Domestic stocks endured a second straight week of losses due mostly to sell-offs on Monday and Tuesday. The tech-heavy Nasdaq performed worst, dragged down by declines in heavily weighted internet and tech stocks, and was the only major index to dip under its late-October lows. Tech selling contributed to relative weakness in higher-valuation growth stocks, which underperformed slower-growing value shares for the fourth consecutive week. Energy stocks were also particularly weak, dragged down by a continuing tumble in oil prices, which reached their lowest level in over a year. The typically defensive utilities sector held up best.
As of Tuesday’s market bottom, all of the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google parent Alphabet) had entered a bear market, or off more than 20 percent from their recent highs. A pair of reports in The Wall Street Journal on Monday seemed to heighten tech sector worries. Facebook shares fell after the Journal described internal strife at the company following increased regulatory scrutiny and other recent setbacks. Meanwhile, the Journal also reported that Apple was slashing orders with suppliers of components for the latest iPhones due to disappointing sales. The reports followed reductions in earnings estimates from three major suppliers the previous week.
Trade worries seemed to continue to weigh on sentiment. Vice President Mike Pence and Chinese President Xi Jinping reportedly had a tense exchange at an Asian economic summit the previous weekend, dampening hopes for progress in talks between Xi and President Donald Trump at the G-20 summit at the end of the month. Trade tensions may also have been behind U.S. efforts to restrict its allies’ business with Chinese firm Huawei (more below).
The week’s economic data were generally disappointing, even if they pointed to continued expansion. Wednesday brought word that core (excluding the volatile aircraft and defense segments) durable goods orders were roughly flat in October after a decline in September that was larger than originally estimated. Weekly jobless claims also rose to their highest levels since the summer, and the University of Michigan’s gauge of consumer sentiment fell a bit more than anticipated. Measures of manufacturing and services activity, released Friday, also missed expectations. Existing homes sales in October were a bright spot, rising more than expected and breaking a six-month streak of declines.
Longer-term U.S. Treasury yields declined only slightly for the week despite the disappointing economic data and equity market weakness. The magnitude of recent declines and anticipation of an upcoming rate hike from the Federal Reserve may have provided some upward pressure.
In overseas markets, European stocks fell throughout the week as Brexit and Italy’s budget woes continued to worry traders. The pan-European STOXX Europe 600 Index lost ground in line with a wave of global selling, led by tech shares. In Asia, Japanese stocks were a touch weaker in quiet trading.
Markets in mainland China and Hong Kong slumped on Friday following a report that the U.S. government was lobbying its allies to avoid buying equipment from Chinese telecommunications equipment maker Huawei Technologies, citing security concerns. The benchmark Shanghai Composite sank 2.5 percent on Friday, its biggest percentage loss in a month, while Hong Kong’s benchmark Hang Seng Index shed 0.4 percent, falling 1 percent for the week. More than 100 companies listed on China’s exchanges in Shanghai and Shenzhen were halted from trading after they fell 10 percent on Friday — the one-day maximum allowed by the country’s market regulators. The story on Huawei comes at a time of worsening relations between the U.S. and China. It also dimmed hopes for a breakthrough in the U.S.-China trade battle ahead of a high-stakes meeting between President Trump and China’s President Xi Jinping at the Group of 20 summit set to begin November 30 in Argentina.
Other news and notes follow:
· The FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have collectively lost $1 trillion in market value from their 52-week highs.
· In the last 3 months, the VIX has surged more than 50 percent, per FactSet. The gauge still remains low by historical standards, but it is producing big daily swings.
· President Trump released an exclamation-laden defense of Saudi Arabia last week, saying he stood by the kingdom regardless of whether Crown Prince Mohammed bin Salman ordered Jamal Khashoggi’s murder. When asked what he was thankful for on Thanksgiving, the President replied that he is thankful for his own self-proclaimed “tremendous” work. “I made a tremendous difference in this country,” he added. Mr. Trump also renewed his criticism of the Federal Reserve last week, describing the U.S. central bank as a “problem” as he called for lower interest rates. The Fed is not likely to be swayed.
· The U.S. economy is generally doing well — job growth is strong, wages are climbing, factories are humming and inflation is on target. Yet stocks are sinking, yields on corporate bonds are rising and commodity prices are tumbling, all typical precursors of a slowdown or recession. The causes: Growth outside the U.S. is deteriorating and the Federal Reserve is steadily withdrawing the unprecedented monetary stimulus that buoyed the economy and almost every asset class over the last decade.
· One reason markets may worry that growth is fading: Growth might be fading. The Atlanta Fed’s GDPNow model is tracking a 2.5 percent annualized rate of growth in the fourth quarter, respectable but well short of 3.5 percent in the third quarter and 4.2 percent in the second. J.P. Morgan is forecasting 1.9 percent for all of 2019, an all-too-familiar pace for the current expansion. The triple whammy: “Monetary, fiscal and trade policies all are turning somewhat less friendly for growth next year,” J.P. Morgan economists wrote. In other words, interest rates are rising, the boost from tax cuts is fading and tariffs are acting like a tax increase.
· Many are worried that global growth is slowing. One of the ways this is affecting the U.S. is through the oil market and inflation expectations. Inflation expectations in the bond market are being driven down far more than they should be by the decline in oil prices. A drop today in oil prices shouldn’t affect likely inflation over the next 10 years. But it’s still notable that the breakeven rate on 10-year U.S. Treasury notes, or what investors expect the rate on inflation to be over the life of the securities, dropped below the Federal Reserve’s 2 percent inflation target on Tuesday for the first time this year. Inflation expectations wouldn’t be dropping like they have been if there was great confidence in economic growth. The third-quarter results released by the tech companies, along with the latest batch of disappointing results from retailers, have left many quite worried.
· Here is an interesting Bloomberg Markets interview with Abigail Johnson, chief executive officer of Fidelity Investments, and Kathleen Murphy, Fidelity’s president of personal investing on a range of topics including index funds, gender equity, millennial investors and branch-office design.
· The housing industry has been a drag on the overall economy in five of the last six quarters. That doesn’t seem likely to change much. Builder sentiment fell sharply this month amid worries about affordability. Prices have been climbing faster than incomes for years, in part because there aren’t enough homes on the market to meet demand. Now with a new tax law that that reduces incentives for homeownership and the Federal Reserve raising interest rates, ownership is even more of a stretch.