Weekly Economic Update

Economic Update 10-29-2018

  • Economic data for the week was highlighted by GDP results for the third quarter that came a bit better than expected, strong durable goods orders and jobless claims, as well as mixed housing and sentiment results.
  • Global equity markets fell sharply again, coupled with higher levels of volatility.  Bonds fared well, as investors sought out safety, causing interest rates to decline.  Commodities declined as well, due to weaker energy prices.

U.S. stocks experienced another bout of volatility last week, with global markets all losing several percentage points to reach official correction territory of -10% from peak levels.  Additionally, further details about Saudi involvement in the Jamal Khashoggi murder and threats by the U.S. to exit a nuclear arms treaty with Russia didn’t help sentiment.

Every sector was in the red for the week, with energy and industrials leading the pack downward, while defensive industries consumer staples and utilities ‘only’ losing up to -2% for the week.  Toward the end of the week, story stocks Amazon and Alphabet disappointed on the revenue side, leading for further negative sentiment.

Corporate earnings for Q3 continued to roll in, with about half of the firms in the S&P 500 now having reported, per FactSet.  Results have appeared generally good, as three-quarters of firms have reported a surprise on the earnings side (with overall growth of +23% year-over-year) and half on the revenue side.  Interestingly, this was seen as the worst price response to positive EPS surprises in seven years.  Technology and the new communications services sectors, as well as health care, are leading the way in terms of results above estimates, while energy and materials are at the back of the pack with a far larger ratio of below-estimate results.  The forward-looking P/E, after the recent equity price drawdown, is at 15.5—right in line with historical averages.  There seems to be more dispersion between results than in recent quarters, with some high profile surprises and disappointments both, which hasn’t helped equity market volatility

Foreign stocks suffered to a similar degree as U.S. equities, with the additional headwind of a stronger dollar.  EU negotiations with Italy over the latter’s budget remained a key point of contention—while the initial submission for next year was rejected (a historic first), ECB president Draghi attempted to calm markets with comments along the lines of ‘a solution will be found’.  A few industrial metrics also fell back, and comments from the ECB made it clear that their plan to discontinue bond purchases by year-end will occur as planned.  Emerging markets overall fared similarly to developed markets, with China recovering somewhat with reports of the government pledging 10 bil. in yuan for private firm credit support.

U.S. bonds, to no surprise on a volatile week for equity markets, fared well as investors sought out safe assets.  Government outperformed credit, with high yield losing ground, as expected due to their correlation to equities.  Developed foreign bonds performed similarly well in local terms, but lost ground due to the dollar’s strength.  Yields on Italian bonds fell later in the week, as Moody’s reaffirmed the nation’s investment-grade credit rating and government officials reaffirmed their commitment to the Eurozone.  Emerging market debt declined in keeping with their typical behavior during ‘risk-off’ events.

Real estate held up far better than broader equities, with minor declines for the week, and U.S. segments performing far better than European or Asian groups.  Retail REITs, one of the areas suffering from the worst sentiment in recent quarters, earned sharply positive returns last week, likely as higher quality firms showed lesser exposure to Sears than first feared.

Commodities lost ground generally, in keeping with a stronger dollar, with the energy segment performing the worst.  Crude oil fell over -2% on the week to end at just under $68/barrel, representing a -12% correction from recent highs of $76, over concerns of lower global demand and rising OPEC production.  It also appears hedge funds and other speculators have been unwinding long positions, as forecasts point to oversupply conditions as soon as next year—partially led by U.S. infrastructure additions.

 

Period ending 10/26/2018 1 Week (%) YTD (%)
DJIA -2.97 1.65
S&P 500 -3.93 0.98
Russell 2000 -3.76 -2.42
MSCI-EAFE -3.87 -11.16
MSCI-EM -3.29 -18.90
BlmbgBarcl U.S. Aggregate 0.54 -1.93

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2017 1.39 1.89 2.20 2.40 2.74
10/19/2018 2.31 2.92 3.05 3.20 3.38
10/26/2018 2.33 2.81 2.91 3.08 3.32

 

 

 

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                               

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

 

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