Random Thoughts

On Monday, we lowered our 12-month target for the S&P 500 to 2975 from 3100.

We think that U.S. share-price appreciation should approximate earnings growth. We forecast a 6% rise in S&P 500 EPS next year, which is lower than the current consensus projections of 7.4%, and nearly half the consensus 10% estimate at the end of Q3 2018.

We see value-oriented sectors narrowing the performance gap with growth and suggest investors focus on high quality equities with measurable dividends and low volatility ETFs.

We also think seasonal rotation may come into play in 2019. After a dismal 2018 we feel a stabilizing of foreign equity returns is likely, due to lower P/Es, higher yields and a possible softening in the value of the U.S. dollar.

Finally, since the Fed is nearing the end of its rate-tightening cycle, we think bonds should present increased attractiveness relative to stocks as yields reach more compelling levels

Market Insights 12/12/2018

Trade optimism received a shot in the arm following comments from President Donald Trump and a Wall Street Journal report that suggested China may be considering changes to its 2025 initiative, pushing U.S. equities higher in today’s session.

Treasury yields were higher, as a tame read on consumer price inflation kept a December Fed rate hike within focus.

The U.S. dollar fell as the British pound rallied ahead of a confidence vote in the U.K., crude oil prices declined amid a smaller-than-expected reduction in oil inventories, while gold was higher.

The Markets…

The Dow Jones Industrial Average rose 157 points (0.6%) to 24,527

The S&P 500 Index increased 14 points (0.6%) to 2,651

The Nasdaq Composite advanced 66 points (1.0%) to 7,098

In heavy volume, 985 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.50 to $51.15 per barrel and wholesale gasoline was down $0.02 at $1.42 per gallon

The Bloomberg gold spot price gained $2.18 to $1,245.43 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.3% to 97.06

Consumer price inflation in line with forecasts, mortgage applications rise as rates fall

The Consumer Price Index (CPI) was flat month-over-month in November, matching the Bloomberg estimate, and below October’s unrevised 0.3% increase. The core rate, which strips out food and energy, moved 0.2% higher m/m, in line with expectations calling for it to match October’s unadjusted increase. Y/Y, prices were 2.2% higher for the headline rate, matching forecasts and coming in south of October’s unrevised 2.5% increase. The core rate was also up 2.2% y/y, in line with projections and just above October’s unrevised 2.1% increase. Gasoline prices fell solidly, while wireless telephone services, airline fares and auto insurance components also declined, offsetting increases in shelter, used automobiles, medical care and recreation prices.

The MBA Mortgage Application Index increased 1.6%, following the prior week’s 2.0% rise. The gain came as a 1.8% advance in the Refinance Index was met with a 2.5% gain in the Purchase Index. The average 30-year mortgage rate fell 12 basis points to 4.96%.

Treasuries were lower, as the yield on the 2-year note ticked 1 bp higher to 2.77%, and the yields on the 10-year note and the 30-year bond gained 3 bps to 2.91% and 3.15%.

The U.S. dollar declined despite the surge in the stock markets, with optimism of a trade deal being preserved by comments from President Donald Trump, which continued to suggest progress in talks with China. President Trump also noted that he would be willing to intervene in the U.S. case against the recently arrested—and granted bail in Canada—Chief Financial Officer of Huawei Technologies Co. Ltd, one of China’s largest technology companies, if this would help close a trade deal with China.

Recent volatility has been fueled by Fed monetary policy uncertainty, worries about slowing global growth, and festering European political turmoil, exacerbated by today’s confidence vote for U.K. Prime Minister Theresa May as her Brexit plan has faced heightened scrutiny.

Tomorrow’s economic calendar will offer weekly initial jobless claims, expected to show a decline to 226,000 from the prior week’s 231,000, and November’s inflation picture will culminate with the release of the Import Price Index, anticipated to have fallen 1.0% m/m following the prior month’s 0.5% increase.

Global markets higher on escalation in trade hopes

European equities rallied broadly, along with the U.S. markets, as comments from U.S. President Donald Trump suggested continued trade progress with China appeared to foster some resiliency in the face of political uncertainty and likely caution ahead of tomorrow’s monetary policy decision from the European Central Bank. The British pound moved noticeably higher versus the U.S. dollar ahead of a confidence vote for U.K. Prime Minister Theresa May.

At 4:00 pm EST, it was announced that May had acquired enough support to win her leadership vote. The vote came in the wake of her calling off a key vote on the Brexit plan that was slated for yesterday amid heightened scrutiny of her divorce proposal from the European Union.

French stocks led the way even as budget uncertainty lingered after President Macron announced new spending measures in an attempt to calm recent unrest in the nation. The euro traded higher, while Eurozone industrial production came in slightly stronger than expected for October, and bond yields in the region were mixed.

Stocks in Asia finished higher as optimism regarding some relief from the trade tensions between the U.S. and China appeared to escalate following comments from U.S. President Donald Trump. Japanese equities rallied, with the yen losing some ground, and despite a softer-than-expected read on the nation’s machine orders—a gauge of capital spending—for October. Stocks in mainland China and Hong Kong advanced amid the relatively improved trade sentiment and as November reports on new yuan loans and aggregate financing—a measure of total credit issued—both came in stronger than expected late yesterday.

Markets in Australia and South Korea also moved higher. Shares traded in India gained ground, even as central bank autonomy concerns flared up this week amid the surprise resignation of the head of the Reserve Bank of India and ahead of inflation and manufacturing data released after the opening bell. India’s consumer price inflation decelerated more than expected in November and the nation’s industrial production rose more than projected.

Market Insights 12/11/2018

U.S. stocks were mostly lower in another volatile session as reports of progress in U.S./China trade talks were partially offset by possible government shutdown concerns.

Political turmoil looked to be one of many sources of market uneasiness, including Fed, tariff, and Brexit worries.

The U.S. dollar increased and Treasury yields were mostly higher while gold was down. Crude oil prices were higher after yesterday’s fall.

The Markets…

The Dow Jones Industrial Average fell 53 points (0.2%) to 24,370

The S&P 500 Index decreased 1 point to 2,637

The Nasdaq Composite gained 11 points (0.2%) to 7,032

In heavy volume, 889 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.71 to $51.71 per barrel and wholesale gasoline was up $0.02 at $1.44 per gallon

The Bloomberg gold spot price lost $1.92 to $1,242.55 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.2% to 97.41

Wholesale price inflation tops expectations, small business optimism declines

The Producer Price Index (PPI) showed prices at the wholesale level in November nudged 0.1% higher month-over-month, compared to the Bloomberg forecast of a flat reading, and following October’s unrevised 0.6% rise. The core rate, which excludes food and energy, was up 0.3% m/m, versus expectations of a 0.1% gain, and after October’s unadjusted 0.5% increase. Y/Y, the headline rate was 2.5% higher, matching projections and coming in below October’s unrevised 2.9% gain. The core PPI rose 2.7% y/y last month, north of the estimated 2.5% increase and October’s unrevised 2.6% gain.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for November declined to 104.8, from the prior month’s unrevised 107.4 level, and versus expectations of a dip to 107.0.

Treasuries were mostly lower, with the yield on the 2-year note rising 4 basis points (bps) to 2.77%, the yield on the 10-year note increasing 2 bps to 2.87% and the 30-year bond rate down 1 bp to 3.12%.

Tomorrow, the economic calendar will bring the release of MBA mortgage applications and a key read on inflation, courtesy of the Consumer Price Index (CPI), projected to be flat month-over-month in November, after October’s 0.3% rise. The core rate, excluding food and energy, is estimated to rise 0.2% matching October’s gain. Compared to last year, the CPI is forecasted to be up 2.2%, after the prior month’s 2.5% gain, while the core rate is also expected to be up 2.2% compared to October’s 2.1% increase.

Europe higher as trade concerns get some relief, Asia mixed

European equities finished broadly higher in the wake of yesterday’s battle back in the U.S., with reports suggesting U.S./China trade talks are progressing aiding global market sentiment. Economic data in the region was mostly upbeat with German investor confidence regarding the economy for December unexpectedly improving and U.K. employment change rising more than expected for October.

The markets rose even as Brexit uncertainty was escalated yesterday after U.K. Prime Minister Theresa May called off a key vote slated for today, due to the issue regarding the Irish border, and today’s headlines that suggested a no confidence vote for May could be in the offing.

Stocks in Asia finished mixed while the global markets remained skittish amid the flood of global uncertainties, exacerbated by the above Brexit worries. Japanese equities declined, while South Korean stocks finished little changed.

Australian and Indian shares rose. Adding another wrinkle to the geopolitical uncertainty, the head of the Reserve Bank of India surprisingly announced his resignation for personal reasons, fostering questions regarding the central bank’s autonomy.

Mainland Chinese and Hong Kong equities advanced ahead of data which showed new yuan loans and aggregate financing—a gauge of total credit issued—both came in stronger than expected for November.

Market Insights 12/10/2018

U.S. stocks ended in positive territory Monday after a volatile session saw the Dow swing by more than 600 points.

The S&P 500 rose 0.18%, or 4.64 points, as of market close, with the tech sector outperforming. At the lows of the session, the S&P 500 fell to 2,583.23 points, the lowest level in more than eight months.

The Dow increased 0.14%, or 34.31 points, after shedding more than 500 points to fall to as low as 23,881.37 points earlier in the session.

The Nasdaq rose 0.74%, or 51.27 points.

Oil prices lost steam after surging on Friday following a decision by OPEC+ to cut output by 1.2 million barrels per day in an attempt to help rebalance the oil market. U.S. crude oil futures settled lower by 3.1% to $51 per barrel. Brent crude prices fell 2.76% to settle at $59.97 per barrel.

Recent volatility may have provided one of the most important components of a stock market bottom: fear. We have seen elevated hedging activity, increased trading volume, and extremely negative breadth. We see these signs of fear—as the S&P 500 remained above 2018 lows—as bullish. Keep in mind that retesting prior lows, though painful, is an important part of the bottoming process.

Each of the three major indices declined by about 5% by the end of last week. Equities took a sharp turn lower last week after news broke that Meng Wanzhou, CFO of Chinese tech giant Huawei Technologies, was arrested in Canada and faces extradition to the U.S for allegedly breaching U.S. sanctions on Iran. China on Sunday summoned the U.S. ambassador to Beijing to protest Meng’s detention. The arrest of Meng, an executive of the second-largest smartphone vendor in the world, is viewed as a potential roadblock to the U.S. and China reaching a permanent trade deal.

Other trade-related headlines also rippled through the weekend. White House trade adviser and prominent China hawk Peter Navarro shrugged off tariff concerns as being a source of market volatility in comments during an interview with CNBC on Friday. U.S. Trade Representative Robert Lighthizer said on Sunday that he considers March 1 to be “a hard deadline” to come to a trade agreement with China before new tariffs could then be imposed.

The mixed bag for U.S. equities trailed a downward trend on Monday among global stocks, which have been weighed down in part by weak recent data from major economies. China’s factory inflation and consumer price indices each slowed in November, and import growth decelerated to the slowest rate in more than two years. Japan’s gross domestic product fell to an annualized pace of a 2.5% contraction in the third quarter, the sharpest rate of decline in more than four years.

In Europe, British Prime Minister Theresa May postponed the final vote on her Brexit deal originally scheduled to take place on Tuesday. Earlier reports that the vote would be delayed sent the pound tumbling to its lowest level in 18 months. On Saturday, Amber Rudd, Work and Pensions minister and a close ally of British Prime Minister Theresa May, became the first cabinet minister to offer possible alternatives if parliament rejects May’s proposal to leave the European Union.

Investors might describe 2018 as being both the best and worst of times

2018 started out with hopeful expectations for corporate profit growth that delivered elevated actual EPS earnings.

Yet these firmer fundamentals resulted in slipperier stock returns, as the S&P 500 fell into two mild corrections. Initially, the S&P 500 was projected to record an 11.4% year-on-year gain in EPS in 2018 but are now predicted to have risen by more than twice that percentage, propelled by the late-2017 tax cut.

In addition, each of the first three quarters of 2018 saw growth in excess of 20%, recording 27 consecutive quarters in which actual EPS growth exceeded end-of-quarter estimates.

Not surprisingly, U.S. GDP growth also posted a stronger-than-anticipated expansion, as real GDP was initially seen gaining 2.8% for the year, encouraged by a 2.9% rise in personal consumption. Today, those estimates have risen to 3.2% and 3.4%, respectively.

Yet to quote the Old Milwaukee beer commercial of years past, “It just doesn’t get any better than this.” Indeed, a tailing off of the trend is the theme for 2019, as global GDP growth, along with S&P 500 EPS, face stiffer comparisons.

Fundamental Projections:
• We have lowered its 12-month target for the S&P 500 to 2975 from 3100.
• U.S. share-price appreciation should approximate EPS growth expectations in 2019.
• S&P 500 EPS (Earnings per Share) should rise 5% next year, half the 10% estimate at the end of Q3 2018.
• Value-oriented sectors are expected to perform at least as well as growth groups.
• High quality equities like Dividend Achievers and low volatility ETFs should lead the way in the coming year.
• Seasonal rotation may come into play in 2019 as well.
• Lessening pressure on bonds should offer increased attractiveness relative to stocks.

Historical Headwinds & Tailwinds
• The S&P 500 rose in price 12-months after all 18 midterm elections since WWII.
• Yet below-average stock returns have been the norm in post rate-tightening cycles.
• Republican president + split congress = weakest average gain in the S&P 500 since WWII.
• Volatility is likely to remain on the ascent. The S&P 500 endured only eight 1%+ days in 2017, rising to 57 days in 2018. The average is 51 since 1950 and 75 since 1999.

Market Insights 12/7/2018

U.S. stocks extended a sharp weekly decline back to correction territory, giving up last week’s rally, with mixed commentary from the Trump administration exacerbating trade worries, while a softer-than-expected labor report appeared to agitate growing global growth concerns.

Treasury yields and the U.S. dollar saw some pressure, while gold was higher and crude oil prices added to a weekly recovery following a larger-than-expected production cut announced by OPEC and allies.

The Markets…

The Dow Jones Industrial Average fell 559 points (2.2%) to 24,389

The S&P 500 Index dropped 63 points (2.3%) to 2,633

The Nasdaq Composite tumbled 219 points (3.1%) to 6,969

In heavy volume, 1.0 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.12 to $52.61 per barrel and wholesale gasoline was up $0.06 at $1.49 per gallon

The Bloomberg gold spot price gained $10.59 to $1,248.37 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.2% to 96.63

Markets were solidly lower for the week, as the DJIA fell 4.4%, the S&P 500 Index dropped 4.6%, and the Nasdaq Composite tumbled 4.9%

Employment data lower, unemployment rate holds

Non-farm payrolls rose by 155,000 jobs month-over-month in November, compared to the Bloomberg forecast of a 198,000 increase, and the rise of 250,000 seen in October was revised downward to a gain of 237,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 161,000, versus the anticipated gain of 198,000, after rising by an upwardly revised 251,000 in October.

The unemployment rate remained at 3.7%, matching estimates, while average hourly earnings were up 0.2% m/m, slightly below projections of a 0.3% gain but above September’s revised 0.1% rise. Y/Y, wage gains were 3.1% higher, matching estimates and October’s rise. Finally, average weekly hours were 34.4, down slightly from October’s unrevised 34.5 rate, where it was expected to remain.

The December preliminary University of Michigan Consumer Sentiment Index was unchanged from November’s final read at 97.5, and compared to expectations for a dip to 97.0. A decline in consumer expectations component of the survey countered a rise in the current economic conditions portion. The 1-year inflation forecast ticked lower to 2.7% from 2.8%, and the 5-10 year inflation forecast decreased to 2.4% from the previous 2.6% rate.

Treasuries were higher, with the yields on the 2-year and 10-year notes falling 4 basis points (bps) to 2.72% and 2.85%, respectively, while the 30-year bond rate decreased 2 bps to 3.14%.

Wholesale inventories were revised higher to a 0.8% m/m rise for October from the preliminary estimate of a 0.7% gain, where it was expected to remain. September’s figure was revised upwards to a 0.7% increase from the preliminary report of a 0.6% rise. Sales were down 0.2% m/m, compared to September’s revised 0.1% gain. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—increased slightly from September’s 1.27 months rate to 1.28.

Consumer credit, released in the final hour of trading, increased $25.4 billion during October, well above the $15.0 billion forecast, while September’s figure was adjusted higher to an increase of $11.6 billion from the originally reported $10.9 billion.

Global markets mostly higher as energy stocks rally on oil production cut

European and Asian equities finished mostly higher on the heels of the late-session decisive recovery in the U.S. yesterday. Tech stocks modestly pared losses from yesterday, as investors continued to digest news that the Chief Financial Officer (CFO) of Huawei Technologies Co. Ltd, China’s largest telecom equipment maker was arrested in Vancouver earlier in the week, reportedly related to an alleged violation of U.S. sanctions on Iran.

Energy issues led the way as oil prices were notably higher following the larger-than-expected production cut by OPEC and its allies. The markets showed some resiliency in the face of festering trade concerns that continued to pressure U.S. markets, as well as global growth concerns, exacerbated by today’s U.S. employment report that followed unexpected declines in Japanese household spending and German industrial production. n

Equities post weekly drop as trade risks and Fed worry global markets

After battling back from two-straight weekly drops last week, U.S. stocks gave back most of the gains this week as global market sentiment was unnerved by the uncertainty of a permanent trade deal between the U.S. and China. Wednesday was declared a national day of mourning and markets were closed to observe the passing of our 41st President, George H.W. Bush. Skittishness also continued to ramp up regarding the flattening of yield curves as some yields on the short end had inverted compared to the 5-year note. European political and emerging market uncertainties persisted.

Financials, industrials, materials and technology issues led the selloff, while utilities and real estate rose. Crude oil prices were higher for the second-straight week on the OPEC output production cut and the U.S. dollar dipped.

Treasury yields saw pressure amid the global uneasiness and as stronger-than-expected manufacturing and services sector growth was countered by Friday’s labor report. For more on the market moves, check out our article Stocks Drop on Renewed trade, Economic Fears, which notes that the recent stock market action reminds us how quickly things can change. It’s also a reminder that seemingly-subtle shifts in the direction of fundamental data can lead to significant moves in the markets.

Market Insights 12/6/2018

U.S. stocks clawed back from a sharp drop seen for most of the session, finishing mixed on the heels yesterday’s closure to honor President George H.W. Bush.

Crude oil prices saw heavy pressure amid concerns that OPEC crude oil cuts may be less than expected.

Treasury yields and the U.S. dollar moved lower, while gold was little changed.

The Markets….

The Dow Jones Industrial Average decreased 79 points (0.3%) to 24,948

The S&P 500 Index dipped 4 points (0.2%) to 2,696

The Nasdaq Composite rose 30 points (0.4%) to 7,188

In heavy volume, 1.3 billion shares were traded on the NYSE and 2.8 billion shares changed hands on the Nasdaq

WTI crude oil declined $1.40 to $51.49 per barrel and wholesale gasoline was $0.01 lower at $1.44 per gallon

The Bloomberg gold spot price ticked $0.67 higher to $1,237.96 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 96.76

Services growth remains solid, while employment, productivity, trade and jobs data mixed

The November Institute for Supply Management (ISM) non-Manufacturing Index unexpectedly improved to 60.7 from October’s 60.3 level, and versus the Bloomberg forecast of a dip to 59.0. A reading above 50 denotes expansion. This was the third-straight month north of 60 as new orders and business activity grew at faster rates, though employment growth decelerated and price growth increased. Non-manufacturing activity accounts for a large majority of U.S. economic output and the ISM said respondents remain positive about current business conditions and the direction of the economy, but concerns persist about employment resources and the impact of tariffs.

The final Markit U.S. Services PMI Index was revised slightly higher to 54.7 for November, compared to expectations to be unrevised at 54.4, and was higher than October’s 54.8 level. A reading above 50 denotes expansion. The release is independent and differs from ISM’s report, as it has less historic value and Markit weights its index components differently.

The ADP Employment Change Report showed private sector payrolls rose by 179,000 jobs in November, below the forecast of a 195,000 gain, while October’s increase of 227,000 jobs was revised to a 225,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader November non-farm payroll report, expected to show job growth of 198,000 for both headline and private sector employment.

Final Q3 non-farm productivity was revised to a 2.3% quarter-over-quarter increase on an annualized basis, from the preliminary report’s 2.2% rise, matching estimates. Q2 productivity was unrevised at a 3.0% gain. Unit labor costs were adjusted to a 0.9% gain, from the initial 1.2% rise, versus expectations of a 1.0% increase. Q2 labor costs were revised to a 2.8% decrease, from the initial 1.0% drop.

Weekly initial jobless claims decreased by 4,000 to 231,000, versus expectations calling for a decline to 225,000, with the prior week’s figure upwardly revised at 235,000. The four-week moving average increased by 4,250 to 228,000, while continuing claims declined by 74,000 to 1,631,000, south of estimates of 1,690,000.

Factory orders shrank 2.1% m/m in October, versus expectations of a 2.0% drop, and compared to September’s unfavorably-revised 0.2% increase. Stripping out the volatile transportation component, orders ticked 0.3% higher, after September’s downward-revised 0.1% gain. The final durable goods orders—reported two weeks ago—was revised to a 4.3% fall m/m for October, compared to the estimate of a 2.4% decline. Ex-transportation, orders were up 0.2% m/m, versus forecasts of a 0.1% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, was unrevised at no change.

Yesterday afternoon the Federal Reserve released its Beige Book—an anecdotal report on the nation’s business activity used as a policy tool to prep for the next two-day meeting set to conclude on December 19th. The report showed that most of the Districts “saw modest to moderate” growth, though both Dallas and Philadelphia noted slower growth. Continued tight labor markets, narrowing margins, and consumer spending holding steady were also recorded. Concerns surrounding trade remained, as tariffs were reported to have, along with excessive rainfall, curbed the agricultural sector.

Treasuries were higher, with the yield on the 2-year note falling 4 basis points (bps) to 2.75%, the yield on the 10-year note declining 3 bps to 2.89%, and the 30-year bond rate decreasing 2 bps to 3.15%, after U.S. markets were closed yesterday amid a National Day of Mourning to honor our 41st President, President George H.W. Bush.

Other economic reports due out tomorrow include the preliminary December University of Michigan Consumer Sentiment Index and consumer credit.

Global markets lower with tech, Brexit, and trade uncertainty in view

European and Asian equities saw heavy pressure, with the U.S. markets extending Tuesday’s drop in early trading following yesterday U.S. closure for remembrance. Trade concerns that have flared back up to help contribute to the latest bout of selling pressure in the markets were exacerbated by the arrest of Chinese telecom giant Huawei’s Chief Financial Officer (CFO) reportedly in connection with alleged violation of Iran sanctions.

Financials, energy, technology and materials stocks led the broad-based global market drop as the news seemed to sap sentiment over a 90-day truce on trade struck between the U.S. and China on the day she was detained. Brexit uncertainty remained after setbacks for Prime Minister Theresa May’s party and divorce plan earlier this week, which the Parliament continues to debate ahead of next week’s vote.

Oil prices fell as the first day of OPEC meetings took place with comments by Saudi Arabia’s energy minister suggesting a smaller-than-expected cut in crude oil output.

Random Thoughts

Like a flat-footed fighter, investors were floored by a flurry of worrisome inferences that included the 2-year-to-5-year yield-curve inversion, skepticism toward a near-term resolution to the ongoing trade dispute and the possibility that Friday’s employment report will be strong enough to delay the Fed’s anticipated slowdown in its pace of rate increases.

Even though we do not forecast the start of a recession in the coming six-to-12 months, we project a slowdown of y/y GDP growth to 2.7% by Q4 2019 from 3.2% in 2018 and see S&P 500 EPS growth narrowing to 7.5% next year vs this year’s projected jump of nearly 23%.

As a result, many investment policy committees that we monitor have adjusted their sector recommendations to embrace a more defensive posture by upgrading consumer staples and real estate, while downgrading communication services and financials.

Market Insights 12/4/2018

U.S. equities finished sharply lower, subverting last week’s rally, amid myriad concerns, including differing views and lack of details surrounding the trade truce between the U.S. and China, fears of slowing economic growth, and worries of a slowdown in housing following Toll Brothers guidance.

Treasuries finished higher amid a dormant economic calendar, but it was the inversion of some yields that grabbed investors’ attention, adding another wrinkle to the anxiety.

Crude oil prices pared gains to finish slightly higher ahead of this week’s OPEC meeting and the U.S. dollar recovered from an early loss to end only modestly lower, while gold gained ground.

The Markets…

The Dow Jones Industrial Average tumbled 799 points (3.1%) to 25,027

The S&P 500 Index fell 90 points (3.2%) to 2,700

The Nasdaq Composite plunged 283 points (3.8%) to 7,158

In heavy volume, 1.1 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq

WTI crude oil inched $0.30 higher to $53.25 per barrel and wholesale gasoline was up $0.01 at $1.44 per gallon

The Bloomberg gold spot price was $8.04 higher at $1,238.71 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.1% to 96.97

Treasury yields fall as concerns resurface

Treasuries were higher, while the U.S. economic calendar was void of any major releases today. The yield on the 2-year note dipped 2 basis points to 2.80%, the yield on the 10-year note dropped 6 bps to 2.91%, and the 30-year bond rate fell 9 bps to 3.17%. The markets are paying close attention to the yield curve, which has flattened and some yields on the short end have inverted compared to the 5-year note to cause some economic concern.

The U.S. dollar overcame early losses to finish only modestly lower and the pressure on the stock markets intensified after last week’s sharp rally that culminated with the agreement between the U.S. and China over the weekend to call a 90-day truce on further tariffs, though skepticism is flaring up regarding the agreement.

Please note: the U.S. financial markets will be closed tomorrow, which has been declared a National Day of Mourning to honor our 41st President, President George H.W. Bush. In addition, with U.S. government offices closed as well, scheduled economic indicators will be pushed to Thursday, except for the Federal Reserve’s Beige Book, which will be released on time tomorrow.

Europe and Asia lower as trade deal garners caution

European equities finished lower, following yesterday’s broad-based advance, though the weekend agreement between the U.S. and China on a 90-day trade truce appeared to foster some uncertainty, particularly in the auto sector, regarding what was agreed to and if it will lead to a permanent agreement.

The euro relinquished early gains versus the U.S. dollar, with the flattening yield curve in the U.S. garnered some attention, while U.K. Brexit ambiguity remained. The U.K. Parliament is debating Prime Minister Theresa May’s Brexit deal this week with a vote expected next week, while an advisory opinion from the European Union’s top court that suggested the U.K. should be able to stop the Brexit process also added another wrinkle to the uncertainty.

Bond yields in the region finished mixed. The energy sector dipped as crude oil prices gave up an early attempt to add to yesterday’s recovery that came as this week’s OPEC meeting is expected to deliver a production cut, and further bolstered by reports that Russia and Saudi Arabia agreed to extend a pact to manage the markets.

Stocks in Asia finished mostly lower following a recent rise with the markets digesting the implications of the weekend trade truce agreement between the U.S. and China. However, Chinese equities continued to gain ground, with those traded on both the mainland and in Hong Kong posting modest gains.

Stocks in Japan fell, with the yen gaining noticeable ground on the U.S. dollar and Australian securities were lower, weighed down by weakness in the banking sector and following the Reserve Bank of Australia’s monetary policy decision to keep its stance unchanged as expected. Meanwhile, markets in South Korea and India also lost ground.

Market Insights 12/3/2018

U.S. equities added to last week’s rally following the weekend agreement at the G20 summit between the U.S. and China for a 90-day waiting period on further tariffs while the two parties look to solidify a trade deal.

Energy issues gained ground amid a noticeable bounce in crude oil prices ahead of this week’s OPEC meeting, with hopes of a production cut high, and amid reports that Russia and Saudi Arabia extended a pact.

Treasuries were mixed, gold finished higher, while the U.S. dollar lost ground. News on the equity front surrounded a number of M&A announcements.

The Dow Jones Industrial Average (DJIA) rose 288 points (1.1%) to 25,826

The S&P 500 Index gained 30 points (1.1%) to 2,790

The Nasdaq Composite advanced 111 points (1.5%) to 7,442

In heavy volume, 985 million shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq

WTI crude oil jumped $2.02 to $52.95 per barrel and wholesale gasoline was up $0.03 at $1.43 per gallon

The Bloomberg gold spot price was $9.96 higher at $1,230.48 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.2% to 97.04

Manufacturing activity tops forecasts as new orders show strong growth

The Institute for Supply Management (ISM) Manufacturing Index for November rose to 59.3 from the unrevised 57.7 in October, versus the Bloomberg forecast calling for a dip to 57.5, with a reading above 50 denoting expansion. The index suggested growth was stronger than expected as new orders jumped 4.7 points to 62.1, production ticked higher to 60.6 and employment rose 1.6 points to 58.4. Inventories gained 2.2 points to 52.9, order backlogs nudged higher to 56.4, and new export orders were flat at 52.2. However, supplier deliveries dipped to 62.5 and prices fell 10.9 points to 60.7. ISM said respondent comments reflected continued expanding business strength.

The final November Markit U.S. Manufacturing PMI Index was revised to 55.3 from the preliminary reading of 55.4, where it was expected to remain. The index was below the 55.7 level posted in October, with a reading above 50 indicating growth in output. The release is independent and differs from ISM’s manufacturing report, as it has less historic value and Markit weights its index components differently.

Construction spending dipped 0.1% month-over-month in October, versus projections of a 0.4% increase, and following September’s downward revision to a 0.1% decline. Residential spending decreased 0.5% m/m, though non-residential spending ticked 0.1% higher.

Treasuries were mixed, as the yield on the 2-year note rose 4 basis points to 2.83%, the yield on the 10-year note was flat at 2.99%, and the 30-year bond rate lost 2 bps to 3.27%.

The U.S. dollar slipped and the stock markets added to last week’s sharp rally. The equity markets appeared to continue to find support from last week’s speech by Fed Chairman Jerome Powell and the minutes from the Central Bank’s November monetary meeting, which eased concerns about the Fed potentially making a monetary policy mistake by continuing its pace of rate hikes despite some global headwinds. However, the eased Fed concerns are taking a back seat today to the weekend meeting between the U.S. and China at the G20 summit in Argentina that delivered a 90-day truce on further tariffs so the two nations can continue trade negotiations.

Crude oil prices also rebounded noticeably, bolstered by reports of an agreement between Russia and Saudi Arabia to extend a deal to manage the market into 2019, ahead of this week’s OPEC meeting, which is expected to deliver a production cut agreement. Today’s manufacturing data kicked off a heavy week on the economic front that will culminate on Friday with the November non-farm payroll report, forecasted to show job growth remained solid and wages continued to grind higher.

Please note: the U.S. financial markets will be closed on Wednesday to honor former President George H.W. Bush.

Tomorrow’s economic calendar will be void of any reports, and Fed Chairman Powell’s expected testimony on Wednesday in front of the Joint Economic Committee of Congress was delayed , as Wednesday has been declared a national day of mourning to observe the passing of our 41st President, George H.W. Bush. A future date has yet to be scheduled.

Europe and Asia rally as global markets cheer trade truce

European equities finished broadly higher, with the global markets advancing on the weekend’s developments on trade between the U.S. and China at the G20 summit in Argentina. The two nations agreed to a 90-day pause on escalating tariffs so they can continue negotiations and try to reach a trade deal. Energy issues also moved nicely higher amid a rebound in crude oil prices ahead of this week’s OPEC meeting that is expected to bring a production cut, despite the news that Qatar announced that it was leaving OPEC, and following reports that Russia and Saudi Arabia agreed to extend a pact to manage the markets.

The euro was higher versus the U.S. dollar and bond yields in the region were mostly lower, while Markit’s Eurozone Manufacturing PMI Index was revised to a slightly faster pace of growth than initially reported for November. The British pound was little changed even as U.K. manufacturing growth, reported by Markit, accelerated more than anticipated, with Brexit uncertainty festering. U.K. Prime Minister Theresa May’s future remains in question as Parliament continues to mull her Brexit deal this week ahead of a vote on December 11.

Stocks in Asia finished nicely higher, led by Chinese markets on the news over the weekend that the meeting between the U.S. and China at the G20 summit finished with a 90-day agreement to pause on escalating tariffs so the two nations can continue negotiations to try to find a trade deal. Stocks in mainland China and Hong Kong rallied, as the trade truce carried the bulk of the weight, while a relatively positive manufacturing report from Caixin and a rebound in energy issues also likely aided the advance.

Crude oil prices rebounded ahead of this week’s OPEC meeting that is expected to deliver production cuts, while reports of an extension of a pact between Russia and Saudi Arabia could have lent some support. Japanese equities advanced, even as the yen gained some ground, and markets in South Korea and Australia rose, while shares in India only ticked higher, with gains likely limited by late-Friday’s Q3 GDP report that showed growth in the nation decelerated by a larger-than-expected amount.