Round-Up the Usual Suspects

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Given this week’s market turmoil, it seems to be a good time to bring back the above chart before getting to what happened this week and why.

And now the news…

Major Strasser has been shot. Round up the usual suspects.

-Captain Louis Renault (Claude Reins), in Casablanca

After the previous week’s big bounceback, last week saw the markets return to volatility and downward pressure. Domestic stocks dropped sharply last week, erasing 2018 gains as the usual suspects, including trade tensions, fears of slowing U.S. and Chinese economies, Fed worries, and international geopolitics returned to prominence after the previous week’s reprieve. The tech-heavy Nasdaq and the smaller-cap benchmarks fared worst. Markets were again highly volatile, although the VIX remained below the multi-month highs it had established in October. Tumbling longer-term U.S. Treasury bond yields heavily influenced equity markets — weighing on sentiment generally and punishing financial shares by lowering lending margins for banks, but benefiting utilities stocks, whose dividends became more attractive in comparison. 

The Nasdaq fell 3.05 percent, the Dow dropped 2.24 percent, and the S&P 500 was down 2.33 percent, their worst start to a December since 2008. Stocks had earlier climbed on the back of renewed expectations for the Federal Reserve to pursue a slower interest-rate path. The benchmark 10-year U.S. Treasury note closed last week yielding 2.85 percent. The Fed is still widely expected to hike the fed funds rate by a quarter percentage point next week, but the path for next year is now seen as much less certain. U.S. financial markets were closed on Wednesday in observance of a national day of mourning due to the passing of former President George H.W. Bush.

The U.S. trade conflict with China again seemed to dominate sentiment. Stocks jumped in early trading Monday, following the weekend announcement from the White House that China had agreed to increase agricultural imports from the U.S. and eliminate tariffs on U.S. auto imports. In return, officials said that the U.S. had agreed to postpone for 90 days a planned increase from 10 to 25 percent in the China tariff rate.

However, trade optimism evaporated on Tuesday, sending stocks sharply lower by the close. Traders appeared to respond to a series of tweets from the president, in which he questioned whether a “real deal” was possible with China and referred to himself as a “Tariff Man.” Traders also seemed worried because the Chinese failed to acknowledge many of the details in the purported agreement and the administration itself offered conflicting statements over when the clock would start on the 90-day postponement. Finally, the appointment of U.S. Trade Representative Robert Lighthizer, viewed by many as a trade hawk, to oversee trade negotiations was seen as bad news.

After a short respite due to a report from The Wall Street Journal that the Fed could slow to expected pace of its tightening measures (and the futures market now suggests one tightening in 2019 rather than the two that was previously deemed likely), the dispute with China took a new and concerning turn on Thursday, sending stocks sharply lower again. Reports surfaced that Canadian officials had acted at the request of the U.S. over the previous weekend and arrested a high-profile executive of Chinese telecom giant Huawei on suspicion of violating Iranian sanctions. White House officials later stated that President Trump had been unaware of the extradition request while he was meeting with President Xi Jinping of China, but the arrest sparked widespread condemnation in China. U.S. officials have viewed Huawei’s technology as a security threat and have pressed allies not to do business with the firm.

The slump turned into a stampede Friday, as November payroll gains missed expectations and appeared to spark another round of selling to end the week. The jobs figures are evidence of a slow cyclical decline in the labor market, but moderating gains will sustain downward pressure on the unemployment rate through next year, according to most analysts. Indeed, some other recent economic data surprised on the upside. Gauges of both manufacturing and service activity increased from already elevated levels, and the preliminary release of the University of Michigan’s index of consumer sentiment in December came in a bit above consensus forecasts. 

Another factor in the market’s declines appeared to be a partial inversion of the yield curve. For the first time in over a decade, yields on 5-year Treasury notes briefly fell below 3-year U.S. Treasury note yields. Although a yield curve inversion is concerning as a harbinger of recession, the 3T/5T spread is generally not seen as noteworthy. Moreover, inversions can come years before the onset of a recession, and quantitative easing by central banks to put downward pressure on long-term rates may be distorting signals being sent by the bond market. The more closely watched (and significant) 2- to 10-year portion of the yield curve did not invert last week but did trade at its tightest level since 2007.

European stocks fell throughout last week, as hopes soured for reduced trade tensions between the U.S. and China. The pan-European STOXX Europe 600 and the FTSE 100 fell more than 3 percent on Thursday alone, their worst one-day declines since the June 2016 Brexit vote. The auto industry there was hit particularly hard, as the U.S. affirmed that it does not have a deal in place for China to eliminate tariffs on American-made cars. Germany’s DAX, the broadest measure of shares in Europe’s largest economy, fell more than 4 percent for the week, slipping into bear market territory, and in line with steep declines in global stocks. The index, which has lost 20 percent since its January 23 peak — its worst performance since 2008 — is very sensitive to global economic concerns given the many automotive-heavy and export-driven member companies. Automakers and industrial stocks led the declines on concern that a re-escalation of U.S.-China trade tensions could put barriers on exports to Germany’s two biggest markets.

Stocks in China closed last week higher, but news of the Chinese telecom executive’s arrest late in the week turned sentiment around. The Shanghai Composite and large-cap CSI 300 began the week stronger after Presidents Trump Xi agreed on a 90-day tariff truce. As in the U.S., the temporary truce lifted hopes that the U.S. and China would resolve the trade rift that has increasingly been taking a toll on profitability for U.S. and Chinese companies. The arrest, pending extradition to the U.S., brought outrage in China and threatened to sink Sino-U.S. relations to a new low. Both the Shanghai Composite and the CSI 300 pared their weekly gains to less than one percent by the end of the week. Elsewhere in Asia, Japanese stocks declined broadly and are significantly underwater YTD.

Other news and notes follow.

Millennials aren’t trying to be weird or different. Instead, they’re “less well off than members of earlier generations when they were young, with lower earnings, fewer assets, and less wealth,” according to a Federal Reserve discussion paper. “These balance sheet comparisons likely reflect, in part, the unfavorable labor and credit markets conditions that prevailed during the 2007–09 recession, some of which had prolonged effects.”

President Trump promised to cut regulations for businesses, and he has delivered. Deregulation is hard to quantify, but George Washington University’s Regulatory Studies Center keeps a great website loaded with data.

The closer any asset is to China, the worse it has performed all year. Industrial metals are down 16.6 percent, according to Bloomberg indexes. MSCI’s index of the developed-market stocks most exposed to China is down 8.9 percent. And inside China, a range of stocks tied to consumers have suffered the greatest losses: The CSI 300 index is down 18.9 percent for the year, but consumer discretionary, materials, information technology and telecoms stocks have all shed 26 percent or more.

As noted above, after days of vague Chinese statements and a barrage of comments from President Trump and other U.S. officials, China’s Commerce Ministry finally acknowledged last week that Beijing agreed to a 90-day cease-fire to allow further negotiations. Chinese government agencies and the nation’s supreme court also unveiled tough punishments for infringing on intellectual property, a prominent complaint from the Trump administration. Many are still on edge about whether the trade dispute between the two countries will curtail global economic growth. Meanwhile, hackers behind a massive breach at Marriott International left clues suggesting they were working for a Chinese government intelligence gathering operation, and Canadian authorities arrested the CFO of telecom giant Huawei Technologies at the request of the U.S. for alleged violations of Iran sanctions. The move is the latest in a campaign against the Chinese firm, which the U.S. views as a national-security threat.

U.S. tariffs aren’t stopping foreign-made steel. Since March, foreign companies have been subjected to 25 percent tariffs. Instead of isolating imported steel as the most expensive in the market, domestic steel producers have raised their prices by as much or more, moves that have generated higher profits while also driving up costs for other U.S. manufacturersand for U.S. consumers.

Now is the worst time to make money in the markets since 1972; there was a bull market somewhere in 2008 and 1974, when markets were awful, but not a single one of the eight main asset classes is up at least 5 percent so far in 2018.

Apollo’s Leon Black yesterday sounded the leverage alarm, speaking at a Goldman Sachs conference:

“The credit markets, unlike the equity markets, have gone to bubble status. The amount of covenant-less debt is more than 2007. You have a thirst for yield that exists on a global basis. So there is true excess.”

This assertion came just hours after Moody’s published (as reported by Axios) a report on the “alarming” number of private equity-backed companies with poor credit ratings, which “suggests an elevated default risk when credit conditions become more difficult and investors’ appetite for risk diminishes.” Moody’s says that around 90 percent of PE-backed debt issues are rated B2 or lower, compared to just 40 percent of spec-grade companies without PE sponsorship. But, right now at least, creditor recoveries are fairly similar for companies with and without private equity sponsors. This news came as debt multiples are on the rise for private equity companies. S&P LDC provided Axios with data showing that debt-to-EBITDA multiples for private equity deals are at their highest average levels since 2007. Bottom line: There’s not a lot of cushion there.

With a bipartisan array of five U.S. presidents seated in the front pews, former President George H.W. Bush was remembered for his lifelong commitment to public service, post-Cold War leadership and devotion to friends, families and a good joke at his funeral last week.Family members and politicians all joined in tribute to the former president.The president’s bodily was transported through Texas on the way to burial via funeral train, the first for a president in nearly 50 years.

Are retirement income fears overblown? Meanwhile, an important new survey

found that nearly 40 percent of retirees overspend.

The U.S. trade deficit hit its highest level in a decade.

The U.S. became a net exporter of oil and refined fuels last week for the first time in decades. The shift to net exporter may be short lived, and may have serious climate consequences. Still, it demonstrates that America is moving closer to achieving “energy independence” as the shale revolution makes it one of the world’s top oil producers.

Russia and OPEC have struck a deal to cut oil production by 1.2 million barrels a day that could make a dent in the oil supply glut.

Europe is in political turmoil. Germany’s Christian Democratic Union convened in Hamburg to select a new party leader for the first time since Angela Merkel claimed the post 18 years ago. Annegret Kramp-Karrenbauer, who was Merkel’s choice, was elected CDU leader in a tight race. Merkel intends to serve out her remaining term – until 2021 – but her election makes AKK the most likely successor. In London, Theresa May is feeling the sting of defeats inflicted in the parliamentary debate over a Brexit bill that looks all but certain to fail, and likely to doom her premiership. And in Paris, Emmanuel Macron has given in to a violent rebellion but not yet managed to end it.

U.S. employers slowed their pace of hiring in November, but wage growth matched the highest rate in nearly a decade and unemployment held at a very low level, showing the labor market remains a pillar of strength even as the stock market and other economic signals flash caution. U.S. nonfarm payrolls increased a seasonally adjusted 155,000 in November, the Labor Department reported on Friday. The unemployment rate held steady at 3.7 percent last month, again matching the lowest rate since December 1969. Year-over-year wage growth matched the prior month’s 3.1 percent pace as the best rate since 2009. The 155,000 November number is strong by any objective standard, but lower than the 198,000 consensus and the three-month average, at 170,000, was the lowest in a year. It’s also a noteworthy sign of economic deceleration. There have already been hints of that in rising claims for unemployment insurance, slumping housing activity, and in markets: stocks have been grinding lower and the yield curve is nearing an inversion, a popular leading indicator of recession.

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Big Bounceback

The major U.S. equity indexes bounced back strongly from their second correction of the year last week, with the S&P 500 recording its best weekly gain since December 2011. The large-cap indexes and the tech-heavy Nasdaq outperformed the smaller-cap benchmarks, and higher-valuation growth shares outpaced slower-growing value stocks for the first time in a month. Healthcare and information technology shares outpaced the rest of the S&P, while materials shares performed worst. The financials sector struggled as longer-term interest rates fell, threatening bank lending margins. Energy shares also lagged as domestic oil prices fell below $50 per barrel for the first time in over a year.

Last week, stocks jumped strongly out of the gate, aided by favorable news from the European Union’s meeting over the weekend and positive Black Friday weekend sales data. Internet sales from Wednesday through Black Friday surged by 26.4 percent over the same period in 2017, according to data tracked by Adobe Systems. Store traffic declined between 5 and 9 percent compared to the year before, but the drop was smaller than many had feared.

As has often been the case in recent months, trade headlines threatened to offset the market’s advance. Stocks opened lower on Tuesday morning after The Wall Street Journal published a report that President Trump planned to follow through on his threat to increase the tariff rate on many Chinese goods from 10 to 25 percent at the beginning of 2019. Stocks regained momentum, however, after White House Chief Economic Advisor Larry Kudlow told reporters that the meeting between Trump and Chinese President Xi Jinping offered “an opportunity to break through what have been disappointing discussions.” Positive comments from a senior Chinese economic official as the G-20 summit convened on Friday may have provided a further boost to sentiment to end the week.

The week’s primary positive catalyst seemed to come on the monetary policy front. Stocks rallied sharply on Wednesday following a speech by Fed Chair Jerome Powell in which he stated that the federal funds rate is “just below” a neutral level that would neither stimulate the economy nor rein in growth to curb inflation. Some disappointing economic data had already lowered expectations for future rate hikes, and Powell’s comments seemed to moderate them further. Another quarter-point hike at the Fed’s upcoming meeting in December still appears highly likely, however.

The week’s economic data were mixed. The Commerce Department reported that new home sales dropped by nearly 9 percent in October to their lowest level in two and one-half years. The decline was in sharp contrast to consensus expectations for a 3.7 percent increase, although previous months’ sales were revised higher. Pending home sales also recorded a surprising drop, and home prices rose less than expected in September. Weekly jobless claims recorded their fourth consecutive increase, and another regional manufacturing index came in below expectations. On the positive side, both personal spending and income rose at a solid pace in October and surpassed consensus estimates. The economic data and Powell’s comments pushed the yield on the benchmark 10-year U.S. Treasury note to dip below the 3.0 percent threshold for the first time since mid-September.

In overseas markets, the pan-European Stoxx Europe 600 Index was up slightly after a week filled with geopolitical tensions, as investors sorted through conflicting signals on Brexit and braced for the weekend G-20 meeting. The FTSE 100 Index was lower on the week, and the pound dropped against the U.S. dollar, as the future of Brexit hung in the balance. Stocks got a boost after news of a Brexit deal the previous Sunday between the EU and the U.K. While the EU endorsed British Prime Minister Theresa May’s proposed Brexit plan, she will still need to win the approval of Parliament on December 11, which some analysts predict will result in a humiliating defeat. However, President Trump suggested that May’s deal could threaten a U.S.-U.K. trade agreement.

Markets in mainland China edged slightly higher last week as traders stayed cautious ahead of the weekend’s G-20 summit. Most analysts have dim hopes for a breakthrough in the U.S.-China trade impasse at the G-20 meeting in Argentina, reflecting the major differences between both sides. Notwithstanding the low expectations, the meeting between President Trump and his Chinese counterpart, Xi Jinping, is generally seen as the best opportunity for both countries to halt an escalating trade war. The Nikkei 225 tallied five consecutive daily gains as it, and other major Japanese indexes recorded strong gains last week.

Other news and notes follow.

Ivy League endowments have been well-known for focusing upon off-the-beaten-path “alternative” investments. However, over the past ten years, not a single one of them has beaten a simple, and once endowment standard, 60:40 portfolio, despite much higher volatility.

EY — the former Ernst & Young — has just released The Millennial Economy 2018, which updates the data from a survey named The Millennial Economy that was conducted 2 years ago. Two big findings stand out.

• The proportion of millennials living with their parents has plunged, from 30 percent in 2016 to 16 percent in 2018; and
• The proportion of millennials who own their own home has soared, from 26 percent in 2016 to 40 percent in 2018.

It is hard to predict precisely the effects of a warming planet, but the world of business and finance is trying to put prices on it. Agriculture is among industries on the front lines because a warming climate changes the crops that farmers can plant, affecting the productivity and value of their land. Right now, warming temperatures are expanding regions suitable for corn, grapes and other crops.

Despite a bounce last week, stocks, bonds and commodities from copper to crude oil are staging a rare simultaneous retreat. It’s putting global markets on track for one of their worst years on record and deepening a sense of unease on Wall Street.

GM is laying off 14,300 employees. It’s shuttering five factories in the U.S. and Canada, and says that two more closings will be announced internationally. By next year, it will no longer make the Buick LaCrosse, the Chevrolet Impala, or the Cadillac CT6 sedan. It’s even killing the Chevy Volt plug-in hybrid. President Trump’s trade war and steel tariffs are costing the auto industry billions, including roughly $700 million in higher steel prices at GM alone. Meanwhile, all the top-selling sedans in America — the Toyota Camry, Honda Civic, Honda Accord, Toyota Corolla, Nissan Altima, and Nissan Sentra — are Japanese.

Thucydides chronicled the 30-year Peloponnesian War, which pitted Sparta against the rising power of Athens. “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable,” Thucydides wrote. In 12 of past 16 cases in which a rising power has confronted a ruling power, the result has been bloodshed. Does that mean the U.S. and China are headed for war (more here)? In short, officials from the U.S. and China maneuvered and often miscalculated. The two countries are on the brink of a new Cold War, with tensions over trade at the top of the agenda. Both are erecting increasingly punitive tariff barriers, putting into play their reputations and the fate of major industries. That the two countries arrived at this point, despite years of tension, wasn’t inevitable. Here’s how it played out. Presidents Trump and Xi met yesterday at the G-20 summit in Argentina and had dinner together. After the meeting, White House Chief Economic Advisor Larry Kudlow reported that it went “very well,” and multiple reports had President Trump and Chinese President Xi agreeing to a temporary trade ceasefire to allow time for more negotiations.

However, the U.S. and China have been exploring a trade deal whereby Washington would hold off on further tariffs in return for new talks looking at big changes in Chinese economic policy. China may need a deal because its economy isn’t doing great. Its official manufacturing index showed no expansion in business activity for the first time since mid-2016. Sales prices fell for the first time since March. Most concerning: the gap between output and new orders is now at its widest since early 2017 — Chinese factories are producing more than they are selling. And the labor markets look shaky too.

China is going to judge every resident based upon behavior by the end of 2020. Already, the Chinese government deploys over one million spies to keep an eye on its own people. Google secretly helps them. It has stepped up its spying on U.S. technology firms, too.

Officials signed the renegotiated North American Free Trade Agreement, rebranded the U.S.-Mexico-Canada Agreement, yesterday, also in Buenos Aires, on the sidelines of the G-20 summit. It is a signature achievement of President Trump, who won concessions from Canada and Mexico, which feared it could have been much worse.

The president has canceled a planned meeting with Russian leader Vladimir Putin at the G-20, citing Russia’s recent seizure of three Ukrainian naval ships, via Tweet.

President Trump’s trade war is “slamming parts of the American economy, especially in Midwestern and farm belt states that helped propel him to the White House” and virtually every economist, irrespective of politics, thinks it’s a bad idea. But the president has believed in tariffs for decades and is unlikely to change his mind now.

Federal Reserve Chairman Jerome Powell ignited a market rally Wednesday when he said interest rates are “just below” neutral. That doesn’t sound like much but traders took it as a sign the Fed will stop raising rates sooner rather than later and keep the economy from intentionally cooling. The Federal Reserve has raised rates by a quarter-percentage point every three months over the past year. Officials appear ready to follow that pattern with another increase next month. After that, they’re flexible. According to the Fed, these are the top vulnerabilities of the U.S. financial system.

U.S. crude oil fell below $50 for the first time since October 2017 last week amid mounting pressure on OPEC and its allies to rein in supply and bolster prices. Cheap oil is a mixed bag for the U.S. economy: consumers get a break on gasoline prices but energy firms are likely to hold off on new investment and hiring.

Life expectancy for Americans fell once again last year because of the opioid and suicide crises, continuing the longest sustained decline in a century. The Centers for Disease Control and Prevention reported that life expectancy fell by one-tenth of a year, to 78.6 years. This was “an appalling performance not seen in the United States since 1915 through 1918, [which] included World War I and a flu pandemic.” The reasons include “the sharpest annual increase in suicides in nearly a decade and a continued rise in deaths from powerful opioid drugs like fentanyl… Influenza, pneumonia and diabetes also factored into last year’s increase.”

The father of the index fund, John Bogle, says their increasing dominance may create some of the “major issues of the coming era.”

Powered by strong income gains, consumers spent more in October, driving economic growth as other sectors such as home building and exports showed signs of softness. At the same time, inflation was subdued.The Commerce Department said consumer spending registered its largest gain in seven months, rising 0.6 percent from September. Incomes were up 0.5 percent. An inflation measure watched closely by the Fed, the personal consumption expenditure price index excluding food and energy, was up 1.8 percent in October from a year earlier, short of the central bank’s 2 percent target and September’s 1.9 percent pace.

One millennial said, “I’m broke and mostly friendless, and I’ve wasted my whole life.” As reported by NPR, a study published this month from the Fed found millennials are less financially well-off than members of earlier generations when they were the same ages, with “lower earnings, fewer assets and less wealth.”

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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.

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FAANGst and More

The markets had a difficult and volatile week. Before we get to the details of what happened and what it might mean, let’s begin with a slight detour.

Suppose that God was a money manager and that beginning on January 1, 1927, at the start of the S&P 500, He considered the five-year “look ahead” returns for all common stocks of the 500 largest domestic companies and bought the five stocks that would have the best performance over the next five years. Then, and every five years thereafter, through the end of 2016, He would repeat the process, selling what he had and buying the five stocks that would have the best performance over the coming five years. God’s portfolio, always owning just the best five stocks, would do fantastically, of course. While the S&P 500 returned 9.97 percent annualized over that period (which is great), God’s portfolio would have earned an astonishing 29.37 percent annualized.

However.

Despite that incredible performance, all of us would still have fired God many times over. Why? Because of the drawdowns. Even a portfolio limited to the best five stocks suffers big drawdowns.

To get the nearly 30 percent annual return from God’s portfolio, an investor would have had to endure ten separate drawdowns of more than 20 percent, including one drawdown of more than 75 percent. Any one of those drawdowns early on would terrify us and we’d have fired God and moved our money somewhere else, probably to cash.

When the market or your portfolio isn’t performing the way you’d like, remind yourself (again and again) that volatility is the necessary price to be paid for the returns available from stocks – which far exceed returns from any other asset class. If you had invested $100 in God’s portfolio at the beginning, $100 in bonds (ten-year U.S. Treasury notes), and $100 in cash (three-month U.S. Treasury bills) at the same time, through 2016 your cash portfolio would have grown to $1,988.00, your bond portfolio would have grown to $7,110.65, a hypothetical investment in the S&P 500 would have grown to a remarkable $328,742.28, and your investment in God’s portfolio would be worth more than the value of the entire market – trillions upon trillions of dollars.

Repeat after me: volatility is the necessary price to be paid for the outsized returns available from stocks as compared with all other investment opportunities.

Now, on to this week’s news.

Domestic stocks fell last week amidst volatile trading. Friday was the 50th one percent move in the S&P in 2018. There were only eight in all of 2017. However, to be clear, 2018 is entirely normal; 2017 was the outlier.

A downturn on Monday saw the S&P 500 record its worst decline in a month. The major indexes reached a low point on Wednesday but remained above recent lows established in late October. Materials, real estate, and industrial stocks outperformed, with the latter helped by rise in 3M shares following a favorable outlook from the company for 2019. For the third-consecutive week, slower-growing value shares generally outperformed higher-valuation growth stocks.

Last week brought a good deal of FAANGst as heavily weighted tech and internet stocks continued to underperform. Apple is the latest FAANG stock to reach bear market territory, generally defined as a decline of over 20 percent from recent highs, after peaking about a month ago. Facebook is down over 35 percent from a July peak and Amazon is off 22 percent since early September. Amazon’s decline weighed on the consumer discretionary sector, which performed worst within the S&P. Netflix has dropped about 33 percent since last June. Google is the best performer of the lot, but still off about 18.5 percent from July’s apex. To go along with the market pressure, there is increasing political pressure on the tech sector too.

Trade concerns seemed to be the primary factor guiding sentiment last week. Monday’s sell-off was accentuated late in the day by news that the White House was circulating a draft of plans for new tariffs on auto imports, a move that would carry significant implications for the domestic auto sector given the importance of international supply chains.

Trade fears diminished later in the week, helping stocks regain some momentum. Thursday traded higher following the release of details on efforts to revive U.S.-China trade talks ahead of the upcoming G-20 meeting. On Friday, President Trump told reporters at the White House that Chinese officials had sent him a list of 142 steps they were willing to take for a trade deal, which was “pretty complete.” The U.S. has threatened to impose tariffs on all Chinese imports and raise the tariff rate from 10 to 25 percent on January 1, 2019, if progress is not made in negotiations.

Other political and geopolitical concerns also seemed to dampen sentiment. Stocks gave up early gains Tuesday after crude prices suffered their worst intraday decline since 2011 following President Trump’s criticism of Saudi production cutbacks. At midweek, financials shares were dealt a blow after the incoming head of the House Financial Services Committee, Rep. Maxine Waters, pledged that “the days of this committee weakening regulations” were coming to an end. A poor reception to the Brexit deal announced on Thursday unleashed political uncertainty in the UK and seemed to ignite further concerns.

The week was also notable for the release of important economic data. On the consumer front, retail sales jumped in October, but the gain was almost entirely due to a rise in gasoline prices and increased spending at the pump. Core retail sales, which exclude auto-related sales and purchases at home improvement centers, moved only slightly higher, while revised data showed drops in August and September. Most analysts expect that spending growth will moderate from its rapid pace in the middle of the year as the savings rate stabilizes. Industrial production rose a bit less than forecast in October. Two regional manufacturing gauges showed an increase in factory activity, but the gains were largely driven by a rise in inventories, usually not a good sign for future production.

Meanwhile, core (ex-food and energy) consumer inflation rose moderately in October, according to Labor Department data released Wednesday. Labor cost inflation has yet to rise to a point where it would put persistent upward pressure on prices, but the underlying data in the report did reveal some hints of higher prices due to Chinese tariffs, an impact that will deepen if the tariff rate increases to 25 percent. Equity market weakness and the decline in crude prices caused a flight to the perceived safe-haven of U.S. Treasury paper during the week, resulting in a sharp drop in yields.

Across the pond, the pan-European STOXX 600 Index fell more than 2 percent, as Brexit fears and Italy’s budget standoff with the European Union continued to unsettle markets. The FTSE 100 Index lost about 1.3 percent, and the German DAX and French CAC 40 both finished lower as well. Banks were among the top decliners on worries that the UK would leave the EU without a deal. The pound came under pressure, falling about 1.24 percent against the U.S. dollar, while the euro dropped about 0.6 percent versus the greenback.

In Asia, Chinese stocks rose last week, as trade-related concerns took a backseat and bargain-hunters scooped up shares that had fallen to depressed levels. The Shanghai Composite rose 3.1 percent for the week, while the CSI 300 Index — a gauge of large-cap stocks — added 2.8 percent. The recovery in the Shanghai comes less than a month after the benchmark index hit a four-year low. Increased interest in Chinese stocks has been driven by foreign investors, who bought yuan-denominated A shares at a record pace since the start of November, according to Bloomberg.

In Japan, the Cabinet Office reported that Japan’s economy contracted at an annualized pace of 1.2 percent in the three months ended September 30, pushing stocks there lower. Natural disasters, tepid domestic consumption, and a decline in exports all took a toll on growth, after gross domestic product expanded at a strong 3.0 percent pace in the previous quarter.

Other news and notes follow.

·     Financial advisors are on the frontlines of the longevity revolution and might consider a withdrawal strategy recommended by the Stanford Center on Longevity.

·     The U.S. is on course to spend more on debt than defense.

·     In the aggregate, hedge funds have produced lousy returns for a long time. That’s why, over the years, their marketing has shifted away from something like “we’ll make you a boatload of money” to the much more restrained, “we offer better risk mitigation.” The usual claim now is that hedge funds should be able to protect you in difficult markets. But that wasn’t the case in October when, in very difficult markets indeed, hedge funds had their worst month since 2011.

·     In just six years, people 55 and older will be 25 percent of the workforce, more than double from 12 percent in 1994. However, few companies appear to have accepted the idea that they need to retain and continue to promote older workers rather than letting them go, according to a recent survey. Public policy hasn’t caught up with the aging society either which, unless adjustments are made, will swamp programs like Medicare and Social Security. This interesting piece from the Harvard Business Review provides a helpful guide to this subject.

·     From The New York Times magazine: “The rapidly aging worldwide population…[is] the seminal event of the 21st century,” says Andrew Carle, founding director of the program in senior-housing administration at George Mason University. The Census Bureau projects that in 2034, for the first time ever, people 65 and older will outnumber those under 18. A similar demographic shift is underway around the globe, and no one seems to have a solid plan for addressing it. “It really comes down to two questions: Where are we going to live, and who is going to take care of us?”

·     North Korea has been making improvements to 16 hidden ballistic missile bases even after moving to dismantle a major site to appease the U.S.

·     New York City (Long Island City, Queens) and Northern Virginia (Crystal City in Arlington County) will be the homes for Amazon’s new headquarters. New York provided “corporate welfare” in the forms of tax breaks and infrastructure improvements totalling more than $60,000 per new job; Virginia provided about half that. Not surprisingly, there is some push-back. “When both Tucker Carlson and Alexandria Ocasio-Cortez find common cause against you, you’ve either done something inconceivably stupid or profoundly good.”

·     The least-educated Americans face higher unemployment, lower insurance coverage, poorer nutrition and other disadvantages.

·     More than 1 million people ditched their cable and satellite TV packages last quarter, the most ever in a quarterly earnings period.

·     The median weekly salary of the nation’s 117.2 million full-time wage and salary workers was $887 in the third quarter of 2018, per the Bureau of Labor Statistics, which comes to roughly $46,000 per year.

·     The global economy took a turn downward in the third quarter with gross domestic product in Japan and Germany — the world’s third- and fourth-biggest economies — contracting. Japan’s economy slid 1.2 percent annualized, while Germany’s fell 0.8 percent. Third-quarter growth in the eurozone was a scant 0.7 percent, the lowest since early 2013. During the same period, China advanced 6.5 percent, the weakest pace for world’s second-largest economy since the financial crisis, largely because consumers there are not spending as hoped. Meanwhile, the U.S. grew at a very strong 3.5 percent rate. So, is the global economic glass half-full or half-empty?

·     The federal government started the new fiscal year on October 1 the same way it ended the last one: with a widening budget deficit.

·     Clients need advice about what to do with their RMDs.

·     The price tag for America’s war on terror through 2019? $6 trillion.

·     General Electric amassed $115 billion of debt with a reputation as one of the U.S.’s safest borrowers. But revelations and questions about its accounting have cut its share price in half this year and pummeled its bond prices into junk territory. A slide below investment grade by GE, whose credit rating is now just three notches above junk, could reshape the junk-bond market.

·     PG&E, California’s largest utility, saw prices of its stock and its bonds fall dramatically last week on growing fears that potential liability costs from destructive wildfires threaten the company’s finances.

·     This earnings season, 161 stocks in the S&P 500 have seen their share price fall despite beating expectations. The average loss has been 5.5 percent.

·     According to the Index Industry Association, benchmarking giants like S&P Global and MSCI have created 438,000 new indexes over the 12 months ending June 30. There are now more than 3.7 million benchmarks globally, dwarfing the roughly 50,000 stocks that trade on exchanges around the world.

·     The Internal Revenue Service announced the tax code’s parameters for 2019, implementing a new method for making inflation adjustments that will result in higher tax payments — and government revenue — over time.

·     U.S. crude oil inventories rose by more than 10 million barrels during the week ended November 9, the largest one-week increase since February 2017. Rising stockpiles amid surging U.S. supply have helped send oil prices into a bear market.

·     U.K. Prime Minister Theresa May seeks to fend off opposition to her Brexit deal and threats to her premiership, but it isn’t going very well. The market reaction was also strong as the pound has been dropping. Here is a guide to the possible outcomes.

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Gridlock is…Good?

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.

·     FINRA’s most heavily fined issues so far this year. Meanwhile, the SEC has stepped up its enforcement.

·     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.”

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Bounceback

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.

·     Bloomberg’s World Leaders’ Political Health Check.

·     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.

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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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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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Losses Intensify

The previous week’s losses intensified last week as domestic stocks fell sharply, with the S&P 500 losing more than 5 percent Wednesday-Thursday, its largest two-day drop since early February. The smaller-cap indexes suffered the biggest declines, pushing the S&P MidCap 400 into negative territory YTD and the small-cap Russell 2000 into correction territory, off more than 10 percent from its recent highs. The VIX spiked and hit its highest level since late March on Thursday, while trading volumes reached their highest level in over eight months. Industrials and materials stocks performed worst within the S&P 500, while utilities stocks fared best. High-valuation growth stocks underperformed slower-growing value shares for much of the week but regained some ground on Friday. Earnings season began positively on Friday and stocks broadly regained some ground, but not as much as might be expected.

Rising U.S. Treasury paper yields, the deepening U.S. trade conflict with China, signs of weakness in the global economy, and other concerns continued to weigh on sentiment during the week, but precisely why everything went south on Wednesday morning remains unclear. The first spark may have been a relatively minor item — a report that China was cracking down on traveling citizens bringing undeclared designer handbags and other goods into the country – which led to a tumble in the shares of luxury goods makers. This was soon followed by news of a rebound in U.S. producer prices in September, which, despite being widely expected, appeared to raise fears about a jump in consumer inflation.

Technical factors came into play later in the day Wednesday, particularly after the S&P 500 fell below its 100-day moving average and seemed to accelerate program-based selling. Selling out of stocks as an asset class rather than trading out of individual shares also appeared to play a role, with ETFs responsible for over one-third of trading volumes.

After some hopeful signs at the opening, selling resumed Thursday, taking the S&P 500, the Dow, and the Nasdaq all below their 200-day moving averages. Once again, systematic selling appeared to be at work, and ETF trading increased to 42 percent of total volumes. Thursday brought some good news about inflation, but it seemed to do little to improve sentiment. Consumer price inflation unexpectedly moderated in September, reaching its lowest year-over-year rate (2.3 percent) since February. The sell-off in equities seemed to push some into the bond market, and longer-term bond yields decreased for the week.

European equities mirrored the broader market and moved lower, as some worried that rising interest rates would curb global growth. The STOXX Europe 600 Index was down about 5 percent for the week, hitting new 52-week lows. Luxury brands were heavily sold amid concerns of weaker-than-expected Chinese growth and new Chinese customs restrictions. Italy’s FTSE MIB Index was down 5 percent for the week and fell into bear market territory — a decline of at least 20 percent from a recent high. Germany’s DAX 30 and France’s CAC 40 also lost about 5 percent. The UK’s FTSE 100 dropped 4.4 percent and entered correction territory, generally defined as a drop of at least 10 percent from a recent peak.

Asian stocks also posted steep losses last week. China decreased the amount of money that commercial banks must put aside at the country’s central bank, a significant move that could release an extra $175 billion into the economy, as Beijing steps up measures to support growth amid a worsening trade war with the U.S.

Other news and notes follow.

·     Congratulations to William Nordhaus and Paul Romer, winners of this year’s Nobel Prize in economics. Nordhaus built models to measure the impacts of climate change on the economy and the costs of addressing it. Romer examined how ideas and knowledge fuel economic growth, and how to foster environments in which knowledge and growth can flourish.

·     Time magazine asked its global network of editors and correspondents to nominate “Genius Companies,” with winners chosen based on originality, influence, success and ambition.

·     The best-performing sector of the American stock market this year, bar energy, has been the consumer discretionary category — the companies that sell the things we like to buy but don’t have to buy, like Amazon and Netflix, which each have over 100 million paying subscribers. Moreover, while the broad stock market is up a very impressive 332 percent from its 2009 lows, consumer discretionary stocks are up a stunning 630 percent.

·     The U.S. consumer overwhelmingly shops at real, physical stores. For all the talk of Amazon’s domination, only 10 percent of US retail sales are made over the internet.The death of shopping malls is exaggerated, too. They are currently 94 percent occupied, according to CBRE. According to the International Council of Shopping Centers, America has 24 square feet of shopping center space per person, compared to 17 square feet in Canada, 11 square feet in Australia and less than 5 square feet in the U.K.

·     “A landmark report from the United Nations’ scientific panel on climate change paints a far more dire picture of the immediate consequences of climate change than previously thought,” The New York Times reports.

·     “Jair Bolsonaro, the divisive, far-right former Army captain, stormed to a huge lead in the first round of Brazil’s presidential elections … as voters enraged by years of recession, corruption scandals and soaring crime rallied around his strongman message,” per Bloomberg.

·     Private-equity firms are on track to raise a record amount for infrastructure investing in 2018. Private-equity firms collectively raised $68.2 billion for infrastructure investment in the first three quarters, 18% more than in the year-earlier period and $2 billion more than in all of 2016, according to Preqin.

·     Last week ushered in third-quarter earnings season: JPMorgan, Citigroup and Wells Fargo announced on Friday morning, with all beating expectations.

·     As the rest of Wall Street cuts all kinds of fees in a race to zero, advisers have been the exception. That is starting to change.

·     Polls suggest the fight over the confirmation of new Supreme Court Justice Brett Kavanaugh likely improves Republicans’ chances of keeping control of the Senate but hurts their chances of keeping control of the House.

·     A convertible bond is a bond that can be converted, at the option of the holder, into stock of the issuer. Some analyze convertible bonds as odd bonds. But in many cases — particularly the weirder cases, which are abundant in convertibles — they are best analyzed as weird stocks.

·     Sovereign wealth funds embrace their growing ambitions.

·     The VIX curve inverted.

·     The deck is significantly stacked in favor of those who can keep working past 65, the AP notes. While the college educated are putting off retirement to enjoy heftier investment accounts, Americans without degrees are retiring early amid worsening health outcomes, in part due to physically demanding jobs. Delaying retirement dramatically increases one’s Social Security entitlement, too.

·     The S&P 500 Index’s sectors were rebalanced last month such that the small Telecoms sector was expanded into a more robust Communications Services sector, with some companies in the Consumer Discretionary and Information Technology sectors being moved into Communications Services. Facebook, Apple and Alphabet left the tech sector, which lost about 21 percent of its market capitalization, to join communications. State Street’s $22.8 billion Technology Select Sector SPDR ETF (XLK) liquidated its holdings of Facebook, Twitter and Alphabet two weeks ago, while the $22.6 billion Vanguard Information Technology ETF (VGT) sold off the shares gradually over several months. Yet the two ETFs combined have seen just $4.3 billion in outflows, less than 10 percent of their combined assets, since the S&P 500 changes were implemented. The new Communications Services Select Sector SPDR ETF (XLC), which launched in June to give investors time to shift to the new sector, has picked up almost $2 billion in new assets since the start of the month, making it one of the most successful fund launches of the year. That means that there was about $45 billion in those two tech ETFs, they had to sell off about $9.5 billion of stock when the tech sector shrank by 21 percent, and then they only had to return about $4.3 billion of that money to investors (which the investors then could put into communications ETFs). The remaining $5.2 billion, presumably, was plowed back into the remaining Information Technology companies, which became more valuable solely because (1) Alphabet and Facebook left their sector and (2) investors didn’t.

·     Over the last 6 years, U.S. bonds (as represented by the Barclays Aggregate Bond Index) have returned 1.3 percent per year, their lowest six-year annualized return in history.

·     Men who retire earlier tend to die younger, but not women, according to the Center for Economic Policy Research.

·     Three excellent researchers present a retirement spending strategy focused on delaying Social Security and getting the most out of RMDs.

·     Lobbyists say they encourage clients to advertise on Fox News programs the president is known to watch, in the belief that Mr. Trump can be swayed by what he sees on television.

·     Data from Gallup shows that confidence in media as an institution is at an all-time low, and both the media and the current political climate are probably to blame.

·     The IMF lowered its forecasts for global economic growth this year and next, citing rising trade protectionism and instability in emerging markets. The IMF said the global economy will expand 3.7 percent this year, down from its April estimate of 3.9 percent. The IMF expects U.S. growth will be 2.9 percent this year, unchanged from its earlier forecasts, meaning that European and emerging-market economies are providing the drag.

·     Half the world is now middle class or wealthier. Therefore, for the first time since civilization began, most of humankind is no longer poor or vulnerable to falling into poverty.

·     Google permanently shut down the consumer version of Google+ yesterday after The Wall Street Journal reported that Google exposed the data of roughly 500,000 Google+ users this past spring, but didn’t disclose the breach.

·     Venezuela’s annual inflation hits 488,865 percent.

·     Ford is preparing for massive layoffs – 12 percent of the workforce; 24,000 jobs – on account of the trade wars, have lost over a billion dollars.

·     At least six deaths have been attributed to Hurricane Michael,which blasted a swath of destruction across several states.

·     After languishing for most of the year, gold prices notched their biggest daily gain since June 2016 on Thursday, climbing 2.9 percent as global stocks extended their losses.

·     Fed funds futures, which investors use to bet on the path of central bank interest-rate policy, showed the odds of policy makers raising rates three times by June 2019 declined to 33 percent from 41 percent late Wednesday. The odds of an increase in December slipped to 78 percent from 83 percent Wednesday.

·     Last week, President Trump continued to vent his unhappiness with the Federal Reserve’s short-term rate increases, calling them “out of control.” However, other administration officials aren’t piling on (at least so far). After Mr. Trump first criticized the Fed this summer, Treasury Secretary Steven Mnuchin said he was “thrilled” with Chairman Jerome Powell and called him a “phenomenal leader.” On Thursday, White House adviser Lawrence Kudlow played down the latest criticism. “The president is not dictating policy to the Fed,” he said on CNBC. Later, Mr. Kudlow added: “And by the way, I think Jay Powell is on target.”

·     Even though they aren’t high by historic standards, mortgage rates hit their highest level in more than seven years this week at nearly 5 percent, a potential blow for an already sluggish housing market.

·     After years of pinched budgets, seniors may get some relief in January when monthly Social Security benefits increase by 2.8 percent.

·     On Thursday, the S&P 500 experienced its twentieth -3 percent day since the bear market ended in 2009. The Nasdaq experienced its eighth -4 percent day. The selling over the last five sessions has been brutal in many cases, with winners and losers alike getting sold. Facebook and Netflix (which was still up 68 percent YTD) hit bear market territory. Google is not far behind. It might not feel like it, and I know it doesn’t make the volatility hurt any less, but the S&P 500 is back where it was in July and is still up 5 percent (TR) this year. So, if you were nervous during the sell-off, maybe you’re taking too much risk, and if you weren’t nervous, maybe you could afford to take a little bit more.

·     3Q18 earnings are perhaps the most meaningful earnings period in at least 10 years. Results are expecting to increase by a whopping 20 percent, but the market may be expecting more. Moreover, for the first time in at least five years technology results are expected to increase less than broader market.

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