Monthly Archives: October 2018

Random Thoughts

Elevated concerns over PEs (politics and earnings) have pressured share prices.

Traditionally the S&P 500 has experienced price weakness in the second and third quarters of midterm election years, due to the uncertainty surrounding the upcoming election.

However, this year’s sell-off has been concentrated in October. Also, recent company comments revealed that fundamental fears are finally coming to fruition, now that Wall Street can no longer deny that global trade disputes are pressuring multinationals’ forward guidance.

The outstanding question is whether CAT is the canary calling for an impending widespread reduction in 2019 EPS growth estimates or if Boeing’s bounce is a better barometer.

It is well known on Wall Street that prices lead fundamentals. The selloff since Sept. 20 pushed U.S. indices down from 9.4% for the S&P 500 to nearly 15% for the S&P SmallCap 600, causing investors to begin wondering if they need to reevaluate EPS growth projections.

By October 26, even though Q3 estimates had been adjusted upward to show a year-over-year gain of 25%, versus the 21% end-of-quarter estimate, the S&P 500 and nine of its 11 sectors saw reductions in full-year 2019 EPS growth forecasts, according to S&P Capital IQ consensus estimates.

Not surprisingly, investors also wonder if EPS peaks have historically coincided with equity price sell-offs. The unfortunate answer is yes. However, selloffs have come in the form of corrections as well as bear markets.

This time around, while we project a deeper decline is always possible, we don’t anticipate a new bear market. Indeed, we think the recent unpleasantness represents the readjustment in the anticipated angle of ascent in share prices over the coming year, due to increasingly challenging year-on-year GDP and EPS comparisons.

Market Insights 10/26/2018

U.S. equities finished solidly lower, adding to a weekly tumble, as the global markets remained anxious amid a host of uncertainties.

Treasury yields and the U.S. dollar fell despite a stronger-than-expected Q3 GDP report, crude oil prices finished higher, and gold gained ground.

The Markets…

The Dow Jones Industrial Average shed 296 points (1.2%) to 24,688

The S&P 500 Index decreased 47 points (1.7%) to 2,659

The Nasdaq Composite declined 151 points (2.1%) to 7,167

In heavy volume, 1.1 billion shares were traded on the NYSE and 2.9 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.26 to $67.59 per barrel and wholesale gasoline was unchanged at $1.81 per gallon

The Bloomberg gold spot price added $1.48 to $1,233.65 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 96.37

Markets were solidly lower for the week, as the DJIA declined 3.0%, the S&P 500 Index fell 3.9%, and the Nasdaq Composite lost 3.8%

First look at Q3 GDP tops forecasts

The first look (of three) at Q3 Gross Domestic Product , the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 3.5%, after the unrevised 4.2% growth in Q2, and north of the 3.3% growth predicted by Bloomberg. Personal consumption gained 4.0%, above forecasts of a 3.3% rise, and following the unadjusted 3.8% increase recorded in Q2. Along with personal consumption, private inventory investment, government spending, and nonresidential spending contributed to the strongest back-to-back quarters of growth since 2014, more than offsetting negative contributions from exports and residential fixed investment.

On inflation, the GDP Price Index came in at a 1.7% rise, below expectations of a 2.1% gain and the unrevised 3.0% increase seen in Q2, while the core PCE Index, which excludes food and energy, moved 1.6% higher, south of expectations of a 1.8% increase, and following the unadjusted 2.1% advance in Q2.

The final October University of Michigan Consumer Sentiment Index was adjusted lower to 98.6, from the preliminary 99.0 figure, where it was anticipated to remain. The index was down from September’s 100.1 level. The downward revision came as a slight upward adjustment to the expectations component of the report was more than offset by a downward revision to the current conditions portion of the survey. Both were down versus the prior month’s figures. The 1-year inflation forecast rose to 2.9% from 2.7% in September and the 5-10 year outlook dipped to 2.4% from 2.5%.

Treasuries were higher, as the yields on the 2-year and 10-year notes decreased 4 basis points to 2.81% and 3.08%, respectively, while the 30-year bond rate declined 3 bps to 3.31%.

Fears remain regarding the possibility the Fed could be heading toward a policy mistake amid the aforementioned headwinds, while the U.S. mid-term election is looming to further feed skittishness in the markets.

Europe falls as markets remain skittish, Asia lower as yesterday’s recovery appeared short-lived

European equities finished broadly lower, with yesterday’s recovery appearing short-lived, courtesy of some disappointing earnings reports on both sides of the pond that seemed to foster skepticism regarding the rebound. Trade, Brexit, Italy’s fiscal stand-off, and festering global growth scrutiny remained in focus and seemed to continue to drain conviction.

The euro and British pound have overcome early losses and finished higher versus the U.S. dollar, while bond yields traded mostly lower

Stocks in Asia finished lower as yesterday’s sharp recovery in the U.S. yesterday appeared to be met with some skepticism as it was followed by disappointing earnings reports from Google’s parent company and Amazon. The earnings disappointments joined lingering trade concerns, festering European political uneasiness and resurfacing worries about slowing global growth.

Stocks in Japan declined, with the yen gaining ground late in the session to exacerbate the mood.

Chinese equities and those traded in Hong Kong dropped following a softer-than-expected trade report out of Hong Kong and amid sustained concerns about the weakening yuan and potential deteriorating financial conditions.

Shares in India fell amid some caution ahead of the nation’s earnings season, while markets in Australia finished little changed and South Korean listings dropped sharply. With the markets remaining jittery and volatility persisting, see our article, Why Are Stocks Volatile When Things Seem to be Going Well?.

Stocks tumble as volatility continued to ramp back up

U.S. stocks fell sharply for the week, along with the global markets, with the Dow and S&P 500 flirting with red figures for the year and the latter briefly touching correction territory. The busiest week for earnings season fostered mixed responses, with guidance and commentary garnering the most scrutiny amid a host of global uncertainties. Nearly halfway through earnings season, about 58% of S&P 500 companies have topped revenue forecasts and approximately 82% have bested profit projections per FactSet.

The earnings focus joined festering uneasiness toward a potential Fed mistake and the looming U.S. mid-term elections added other layers of skittishness. All major sectors fell, with losses for defensive groups like real estate, utilities and consumer staples relatively less severe. More cyclically-sensitive sectors led to the downside, paced by energy issues as crude oil prices dropped for a third-straight week on the lingering economic concerns and remaining supply uncertainty.

Treasury yields fell noticeably, with the 10-year note moving closer to 3.00% than the 7 ½-year high reached earlier this month. The U.S. dollar nudged higher, with the euro seeing some pressure following a dovish takeaway from the European Central Bank’s unchanged monetary policy decision, and the British pound remaining choppy as a Brexit deal continued to be elusive.

Next week will bring a fully-loaded docket of data that could keep the markets choppy. Earnings season will remain robust and the economic calendar will deliver a flurry of key reports, including personal income and spending, Consumer Confidence, non-farm productivity and unit labor costs, the trade balance, monthly auto sales and the ISM Manufacturing Index. However, the headlining release will likely come in the form of Friday’s October non-farm payroll report.

Market Insights 10/25/2018

U.S. equities finished with solid gains, paring a recent rout that took the Nasdaq into correction territory.

Treasury yields were higher and the U.S. dollar gained ground amid some weakness in the euro following the European Central Bank’s monetary policy decision.

Crude oil prices were mixed and gold was lower.

The Markets…

The Dow Jones Industrial Average jumped 401 points (1.6%) to 24,985

The S&P 500 Index rose 50 points (1.9%) to 2,706

The Nasdaq Composite rallied 210 points (3.0%) to 7,318

In heavy volume, 1.1 billion shares were traded on the NYSE and 2.7 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.51 to $67.33 per barrel and wholesale gasoline was $0.01 lower at $1.81 per gallon

The Bloomberg gold spot price decreased $3.57 to $1,230.22 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 96.65

Durable goods orders mixed, jobless claims match forecasts

September preliminary durable goods orders rose 0.8% month-over-month, compared to the Bloomberg estimate of a 1.5% decline and August’s upwardly-revised 4.6% rise. Ex-transportation, orders were up 0.1% m/m, versus forecasts of a 0.4% rise and compared to August’s upwardly-revised 0.3% gain. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, dipped 0.1%, below projections of a 0.5% gain, and the prior month’s figure was revised favorably to a 0.2% decline from the initially reported 0.9% decrease.

Weekly initial jobless claims rose by 5,000 to 215,000, matching estimates, from the prior week’s unrevised 210,000 figure. The four-week moving average was unchanged at 211,750, while continuing claims decreased by 5,000 to 1,636,000, south of estimates of 1,644,000.

Pending home sales rose 0.5% m/m in September, versus projections of a flat reading, and following the downwardly-revised 1.9% decline registered in August. Sales were 3.4% lower y/y, compared to the expected 2.6% drop. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales, which posted the sixth-straight monthly decline in September.

Treasuries were lower, as the yields on the 2-year and 10-year notes rose 3 basis points (bps) to 2.86% and 3.14%, respectively, while the 30-year bond rate ticked 1 bp higher to 3.35%.

Stocks rebounded from yesterday’s sharp drop that extended a recent pullback to near correction territory. Volatility has remained elevated as strong earnings results and a remaining solid domestic economic foundation are countering a host of global headwinds. The markets continue to grapple with trade tensions, Italian fiscal issues, geopolitical concerns and worries that global growth may be decelerating, while the looming mid-term elections in the U.S. are adding another layer of uncertainty for the markets to contend with.

Although the ramped up Q3 earnings season will likely remain in focus, tomorrow’s first read (of three) on Q3 GDP growth could command some attention amid the skittishness in the markets (economic calendar). Output is projected to post a 3.3% q/q annualized pace of growth, following the 4.2% expansion registered in Q2, which would be the strongest back-to-back quarters of growth since 2014.

Personal consumption is forecasted to also be up 3.3% following the prior quarter’s 3.8% increase, while inflation readings are expected to slow q/q. The final read on the University of Michigan Consumer Sentiment Index for October will also be released, expected to remain at the preliminary read of 99.0, but below the 100.1 posted in September.

Europe battles back from early pressure, Asia solidly lower

European equities turned mostly positive, recovering from yesterday’s drop and the recent bout of selling pressure that has come from lingering trade tensions, festering Italian fiscal uneasiness, and growing concerns about global growth. The markets showed some resiliency in the face of a larger-than-expected decline in German business confidence.

The European Central Bank (ECB) kept its monetary policy stance unchanged, as expected, with the customary press conference by ECB President Mario Draghi finding the most scrutiny. Draghi noted that incoming information, while somewhat weaker than expected, remains consistent with base case scenario of ongoing broad-based expansion and gradually rising inflation pressures. He added that risks to the economy remained broadly-balanced, but highlighted Brexit, Italian and trade risks, while saying “significant monetary policy stimulus” was still needed.

The euro reversed to the downside versus the U.S. dollar following Draghi’s remarks. The British pound also turned lower and bond yields in the region finished mixed.

Stocks in Asia finished mostly lower as global markets uneasiness remained, while the U.S. markets tumbled yesterday as mixed earnings and disappointing economic data joined lingering trade, European fiscal, and geopolitical skittishness. Japanese equities fell sharply to lead the way, exacerbated by some strength in the yen as the markets appeared to remain defensive.

Australian securities dropped, with mining issues seeing solid pressure, while South Korean listings were also lower following softer-than-expected Q3 GDP figures. Stocks in Hong Kong and India both fell, though those traded in mainland China battled back from early losses and finished little changed.

Chinese stocks likely found support from reports suggesting a team of state investors deployed some targeted buying of stocks, per Bloomberg, which comes as Chinese officials have tried to calm the markets as of late with some verbal intervention.

Market Insights 10/24/2018

U.S. equities were solidly lower, with losses accelerating into the close to push the Nasdaq into correction territory, as a mixed bag of earnings, more soft housing data, and continued worries over trade and geopolitics overshadowed upbeat reads on manufacturing and service activity.

Treasury yields fell and the U.S. dollar was higher, while a Fed report released in afternoon action showed continued wage and economic growth.

Crude oil prices were mixed following a larger-than-expected rise in oil inventories, and gold was slightly higher.

The Markets….

The Dow Jones Industrial Average tumbled 608 points (2.4%) to 24,583

The S&P 500 Index plummeted 85 points (3.1%) to 2,656

The Nasdaq Composite plunged 329 points (4.4%) to 7,108

In heavy volume, 1.1 billion shares were traded on the NYSE and 2.8 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.39 to $66.82 per barrel and wholesale gasoline was $0.01 lower at $1.82 per gallon

The Bloomberg gold spot price increased $2.67 to $1,232.97 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 96.42

Business activity tops forecasts, new home sales drop

The preliminary Markit U.S. Manufacturing PMI Index showed growth was stronger than expected, rising to 55.9 in October from September’s 55.6 figure, and compared to the Bloomberg estimate calling for a slight dip to 55.3. Moreover, the preliminary Markit U.S. Services PMI Index showed growth accelerated more than expected for the key U.S. sector, increasing to 54.7 from September’s 53.5 figure, versus expectations to nudge higher to 54.0. Readings above 50 for both indexes denote expansion.

New home sales fell 5.5% month-over-month in September to an annual rate of 553,000 units—the lowest since December 2016—versus forecasts calling for 625,000 units, and August’s figure was revised lower to a 585,000 unit pace. The median home price declined 3.5% y/y to $320,000. New home inventory increased to 7.1 months of supply at the current sales pace from 6.5 months in August. Sales fell sharply in the Northeast, and declined in the South and West, while rising in the Midwest. New home sales are based on contract signings instead of closings. The data suggests the rise in interest rates, that began in September, may have had an impact, along with Hurricane Florence.

The MBA Mortgage Application Index increased 4.9%, following the prior week’s 7.1% drop. The rise came as a 9.7% jump in the Refinance Index was met with a 2.0% gain in the Purchase Index. The average 30-year mortgage rate ticked 1 basis point higher to 5.11%.

In afternoon trading, the Federal Reserve release 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 November 8th. The report showed that wages and prices moved higher in all Districts, but at a “modest to moderate pace,” with all Districts also indicating continued tight labor markets.

Concerns surrounding tariffs and trade were also reported, with some retailers unable to raise selling prices. The recent volatility, courtesy of lingering trade concerns, exacerbated Italian fiscal worries, and uneasiness regarding the possibility of slowing global growth, have appeared to foster concerns that the Fed may be heading for a policy mistake.

Treasuries were higher, as the yield on the 2-year note declined 4 bps to 2.83%, the yield on the 10-year note was down 6 bps to 3.11%, and the 30-year bond rate decreased 3 bps to 3.33%. The U.S. dollar rose with the global markets looking skittish after some mixed earnings in the U.S. and festering geopolitical concerns.

Tomorrow’s economic calendar will be quite busy, beginning with weekly initial jobless claims, predicted to increase by 5,000 to a level of 215,000, followed by the advance goods trade balance, with economists projecting that the deficit shrunk slightly to $75.1 billion during September from the $75.8 billion posted in August. Durable goods orders will also be released, expected to have declined 1.5% m/m in September following the 4.4% rise seen in the month prior, while orders ex-transportation and non-defense capital goods excluding aircraft, are predicted to have respective increases of 0.5% and 0.4%.

Pending home sales will come later in the morning, anticipated to be flat for September, and the October Kansas City Fed Manufacturing Activity Index will round out the docket, expected to have ticked higher to 14 from 13 in September, with a reading above zero denoting expansion in activity.

Europe gives up early gains as U.S. markets extend slide, Asia mixed

European equities closed lower after giving up early gains amid some disappointing Markit Eurozone PMI data. The markets also may have been cautious ahead of tomorrow’s European Central Bank monetary policy decision. Weakness in the British pound and euro versus the U.S. dollar likely contributed to the early advance.

The global markets remained skittish as trade tensions between the U.S. and China continued to be elevated. Italian fiscal uneasiness persisted as Italian Finance Minister Tria noted concern about rising borrowing costs and whether the current situation is tenable, while UK Brexit uncertainty lingered.

Stocks in Asia finished mixed, ahead of the release of the European PMI data, with large swings in volatility, even as financial equities were the market’s strongest performers. The back-and-forth market movement has continued following recent verbal interventions by Chinese officials to reassure markets and offer support to struggling non-state firms. Analysts have questioned whether China’s latest round of fine-tuning is sufficient. U.S./China trade tensions continue to hamper conviction.

Stocks in Japan increased, as the yen declined, while Australian equities were modestly lower. Chinese stocks finished mixed, as listings on the mainland rose, but those traded in Hong Kong dipped. Markets in India traded higher.

Random Thoughts

There’s an old Wall Street axiom that prices lead fundamentals.

When the S&P 500, Nasdaq-100 and Russell 2000 are all down from 7% to 12%+ in only 14 trading days, investors begin to wonder if they should “fade the fundamentals,” since these price declines may signal the need to reevaluate EPS growth expectations.

What’s more, they begin to “talk technicals” in search of bottoming patterns and support levels in order to ascertain how long and far this decline may go.

Let’s not forget, however, that October has been the most volatile month since 1950, as it accounted for 15% of the one-day price moves of 1%+ than the next highest month (January).

Not surprisingly, some investors are questioning this bull market’s resolve. We think the S&P 500 will be higher a year from now, though its angle of ascent is being adjusted to a more sustainable trajectory, since GDP and EPS growth should face tougher comparisons in the quarters ahead.

Market Insights 10/22/2018

U.S equities finished the first trading day of the week mixed amid continued uncertainty surrounding trade, geopolitics and global bond yields.

Treasuries were flat with a dormant economic calendar unable to provide any sway and the U.S. dollar continued its trek upward.

Crude oil prices were nearly unchanged and gold finished lower.

The Markets….

The Dow Jones Industrial Average fell 127 points (0.5%) to 25,317

The S&P 500 Index decreased 12 points (0.4%) to 2,756

The Nasdaq Composite rose 20 points (0.3%) to 7,467

In moderate volume, 749 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.08 higher to $69.36 per barrel and wholesale gasoline was unchanged at $1.91 per gallon

The Bloomberg gold spot price declined $4.12 to $1,222.37 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 96.00

Treasury yields nearly unchanged amid empty economic calendar

Treasuries were little changed, with the economic calendar void of any major releases today, as the yields on the 2-year note and the 30-year bond were flat at 2.90% and 3.37%, respectively, while the yield on the 10-year note ticked 1 basis point lower to 3.18%.

For the week, earnings season will likely take top billing, with the markets scrutinizing company guidance and commentary, but the economic calendar will command considerable attention, headlined by Friday’s first look (of three) at Q3 GDP.

Growth in economic output is forecasted to decelerate but remain at a healthy annualized quarter-over-quarter rate of 3.4%, from Q2′s solid 4.2% expansion.

Europe lower on continued political uncertainties, Asia mixed despite intervention in China

European equities finished lower, fading from previous higher levels, with the euro and British pound lower versus the U.S. dollar. Bond yields in the region were generally lower, with rates on Italian issues finishing to the downside on news that Moody’s lowered Italy’s bond rating slightly, but with a stable outlook. While European markets initially reacted positively to some notable early earnings announcements, a rally in Chinese markets and promises from Italy’s populist government that it was ready to act to limit its budget deficit, caution prevailed to temper conviction.

U.K. Brexit remained a focal point, and Prime Minister Theresa May sounded more willing to compromise in talks between the region and the EU. Some saw this willingness as increasing the chances of completing a Brexit deal before next year’s deadline, and May was expected to tell lawmakers that 95% of the Withdrawal Agreement is ready.

Stocks in Asia finished mixed, with shares traded in mainland China and Hong Kong rallying on the heels of verbal intervention by Chinese government officials to reassure markets and offer support to struggling non-state firms amid concerns for widespread margin calls related to shares pledged for loans, and the yuan at previous 21-month lows. President Xi vowed “unwavering” support for the private sector, the country’s stock exchanges committed to manage share-pledge risks, and a government plan to cut personal income tax was released as capital flight concerns have risen with the yuan’s decline.

Japanese equities responded to positive comments from the Bank of Japan and finished higher, and South Korean listings were modestly higher.

Australian securities fell in the midst of new political concerns and markets in India declined amid continued uneasiness regarding liquidity and banking sector concerns, which have joined festering worries toward the emerging markets.

Random Thoughts

Even though last week’s tug-of-war between the bulls and bears ended in stalemate, the vault in volatility caused investor pessimism to persist.

Some are now inclined to sit it out on the sidelines, citing the anniversary of the Great Crash of 1987 as a cause for concern. Even though the S&P 500 is currently off 5.5% from its 9/20/18 peak, the S&P 500 had declined by more than 16% through Friday, 10/16/87, from its 8/25/87 high.

As a result, investors should have been on alert back then to something ominous, whereas today’s “noise” shouldn’t cause most investors to believe another crash is around the corner.

In addition, when comparing today’s fundamental foundations with those from 1987, one will quickly conclude that there are few similarities between then and now. Today, while GDP growth is comparable, the year-on-year advance in Q2 “As Reported” EPS is three times as great as it was in Q3 1987.

What’s more, inflation was nearly twice as high back then at 4.3% as today’s 2.2% most-recent reading. Also, the 10-year yield averaged 9.4% in September 1987 versus today’s 3.2% level, and the Fed funds rate was 500 basis points higher back then at 7.25%, as compared with today’s 2.00%-2.25% target range.

So while the current pullback will likely challenge our bull-market beliefs for the time being, we don’t think we are headed for a repeat of ‘87.

Market Insights 10/19/2018

U.S. equities pared early gains to finish mixed, as conviction tempered in the final session of a bumpy week, with anxiety surrounding the Fed’s tightening campaign and global trade, exacerbated by China’s disappointing Q3 GDP report, joining yesterday’s increased worries about Italy’s fiscal plans.

the Dow was able to remain in the green, getting a boost from upbeat earnings reports from members Procter & Gamble and American Express.

Treasury yields were higher after housing data disappointed, and the U.S. dollar lost ground, while crude oil prices bounced back from a recent tumble and gold also gained ground.

The Markets…

The Dow Jones Industrial Average rose 65 points (0.3%) to 25,444

The S&P 500 Index decreased 1 point to 2,768

The Nasdaq Composite fell 36 points (0.5%) to 7,449

In heavy volume, 937 million shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.47 to $69.12 per barrel and wholesale gasoline was up $0.02 at $1.91 per gallon

The Bloomberg gold spot price added $0.78 to $1,226.59 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 95.72

Markets were mixed for the week, as the DJIA rose 0.4%, the S&P 500 Index was nearly flat and the Nasdaq Composite lost 0.6%

Existing home sales fall more than expected

Existing-home sales in September dropped 3.4% month-over-month to an annual rate of 5.15 million units, from August’s lower-revised 5.33 million rate, and compared to the Bloomberg forecast of a 5.29 million pace. Sales of single-family homes and multi-family structures were down compared to last month and the prior year.

The median existing-home price was 4.2% higher y/y to $258,100, marking the 79th straight month of gains. Unsold inventory came in at a 4.4-months pace at the current sales rate, up from 4.2 months a year ago. Inventory of homes for sale was down m/m but up y/y. Sales declined m/m in the Northeast, South and West, and were unchanged in the Midwest.

Treasuries were modestly lower, as the yield on the 2-year note rose 3 basis points to 2.90%, and the yields on the 10-year note and the 30-year bond ticked 1 bp higher to 3.19% and 3.37%, respectively.

The U.S. dollar declined and the stock markets pared an early advance amid flared-up risk aversion. This was fostered by lingering Fed tightening and global trade concerns being met with Italian fiscal uneasiness after European Central Bank (ECB) President Mario Draghi warned the region about challenging European Union rules and the European Commission scrutinized Italy’s recently approved budget accord.

Europe and Asia mixed amid China data and commentary

European equities finished mixed, coming off yesterday’s late-day slide and the sharp drop in the U.S. as continued scrutiny toward Italy’s spending plans appeared to unnerve the markets. Sentiment likely remained a bit shaky in the wake of China’s softer-than-expected Q3 GDP growth, though the continued upbeat earnings season unfolding in the U.S. may have helped limit some of the uneasiness, along with China’s verbal intervention overnight that helped Chinese markets recover. Energy issues showed some strength, with crude oil prices rebounding from a recent pullback and following some upbeat earnings guidance in the sector. The auto sector continued to be hamstrung, exacerbated by a solid drop in shares of Michelin after the company issued a sales warning for the second half of the year. The group was also pressured by a solid decrease in Daimler AG after the Mercedes-Benz maker issued a profit warning.

The euro and British pound were higher versus the U.S. dollar, while bond yields in the region were mixed. Italian bond yields reversed noticeably to the downside and the nation’s stock markets overcame early losses, after an EU official offered comments that appeared aimed at calming yesterday’s tensions that flared-up. U.K. Brexit remained a focal point and Prime Minister Theresa May sounded a cautiously-optimistic tone regarding progress in talks between the region and the EU, even though a summit this week failed to yield any major breakthrough.

Stocks in Asia finished mixed on the heels of yesterday’s drops in the U.S. and Europe as already-skittish global sentiment was exacerbated by flared-up Italian fiscal concerns. Also, the markets digested a host of Chinese economic data, headlined by the nation’s Q3 GDP report that showed growth slowed to a 6.5% y/y pace—the lowest since 2009—from 6.7% in Q2 and below the expected expansion of 6.6%.

China’s industrial production came in below estimates for last month, but September retail sales increased more than anticipated. However, the data was countered by comments from China’s central bank and top regulators pledging financial support aimed at reassuring the markets in the wake of the recent tumble in stocks.

As such, stocks in China reversed to the upside and rallied higher and those traded in Hong Kong also advanced. Japanese equities trimmed early losses and finished lower, with the yen giving back some of yesterday’s gains, while securities in Australia dipped and South Korean listings traded slightly to the upside.

Markets in India returned to action following yesterday’s holiday break, falling sharply amid continued uneasiness regarding liquidity and banking sector concerns, which have joined festering worries toward the emerging markets.

WEEKLY RECAP – Stocks mixed to close out choppy week

Stocks finished the week mixed in choppy trading, with the Dow following up a 500-point rally on Tuesday with a 300-point drop on Thursday. Volatility remained elevated as uneasiness regarding a potential Fed monetary policy mistake lingered, trade uncertainty festered, emerging market worries continued, and Italy’s fiscal issues flared-up.

Earnings season continued to ramp up, thus far setting a mostly positive tone, with Dow members UnitedHealth Group Inc. and Johnson & Johnson bolstering the health care sector, Netflix Inc trouncing subscriber growth expectations, and United Continental Holdings Inc’s revenue growth overshadowing a “steep increase in fuel costs,” while Dow member Goldman Sachs Group Inc. and Morgan Stanley continued to show the financial sector remains relatively healthy.

With results from 85 S&P 500 companies in the books, about 65% have topped sales estimates and approximately 87% have bested profit projections. Consumer staples led to the upside, bolstered by Friday’s earnings results from Dow member Procter & Gamble, and as the markets appeared to remain a bit defensive, which likely weighed on consumer discretionary issues and helped real estate stocks shrug off another dose of disappointing housing data and some relatively regained momentum in Treasury yields.

Industrials, materials and energy sectors were also bogged down by the aforementioned global market uneasiness, exacerbated by more commentary suggesting an impact of trade tensions, while crude oil prices posted a back-to-back weekly drop in the wake of a recent rally to multi-year highs. The U.S. dollar nudged higher as the minutes from the Fed’s September meeting preserved expectations the Fed will maintain its rate hike campaign. Outside data on housing and autos, the economic landscape continued to look strong, with the retail sales control group figure topping forecasts, along with industrial production, while job openings hit a fresh record high and Leading Indicators continued to grind higher.

Although next week the “meat” earnings season will likely take top billing, with the markets scrutinizing company guidance and commentary, the economic calendar will also likely command some attention, headlined by Friday’s first look (of three) at Q3 GDP. Growth in economic output is predicted to decelerate but remain at a healthy annualized quarter-over-quarter rate of 3.4%, from Q2′s solid 4.2% expansion.

Market Insights 10/172018

While well off the lows of the day, U.S. equities finished lower, paring yesterday’s solid advance, as investors weighed a ramp up in earnings season that continues to bring mostly positive results, disappointing housing data and the Fed’s minutes from its September meeting solidifying its belief to continue on its gradual rate-increase path.

Treasury yields were higher following the Fed minutes and the U.S. dollar rose, while gold lost ground and crude oil prices fell on a much larger-than-expected rise in oil inventories.

The Markets…

The Dow Jones Industrial Average fell 92 points (0.4%) to 25,707

The S&P 500 Index shed nearly a point to 2,809

The Nasdaq Composite declined 3 points to 7,643

In moderate volume, 794 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil tumbled $2.17 to $69.75 per barrel and wholesale gasoline was $0.06 lower at $1.92 per gallon

The Bloomberg gold spot price fell $1.53 to $1,223.42 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 95.62

Housing construction activity misses, mortgage applications drop

Housing starts for September fell 5.3% month-over-month to an annual pace of 1,201,000 units, below the Bloomberg forecast of a 1,210,000 unit rate. August starts were revised lower to an annual pace of 1,268,000. Construction on single-family units dipped m/m, while multi-family construction fell solidly in the Midwest and dropped in the South likely due to the impact of Hurricane Florence. Both figures remained higher y/y. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, decreased 0.6% m/m to an annual rate of 1,241,000, versus expectations of a 1,275,000 pace, and compared to August’s upwardly-revised 1,249,000 rate. Authorizations for single-family structures were higher m/m and compared to last year, but multi-unit permits were down versus the prior month and last year.

The MBA Mortgage Application Index decreased 7.1%, following the prior week’s 1.7% dip. The decline came as a 9.0% drop in the Refinance Index was met with a 5.9% fall in the Purchase Index. The average 30-year mortgage rate rose 5 basis points to 5.10%. For a look at the housing market, check out our article, Housing Data: What Does It Mean for the Economy?

The Federal Reserve released the minutes from its September meeting, which resulted in a third rate hike for the year, noting that a majority of Fed officials believe that its path of continuing to gradually raise interest rates was the best approach in order to preserve a steady economy. The report showed the Committee had confidence in the rate of economic growth, while also noting some caution over the impact of tariffs on such. In discussing the future path of interest rates, Committee members indicated that there may be a period where it will need to go beyond normalization of rates and into a more restrictive phase in order to overshoot its target in an effort to combat “the risk posed by significant financial imbalances.” Last week’s drop in the global stock markets was somewhat fostered by the recent flare-up in concerns that the Fed may be on the verge of a policy mistake given a host of simmering global risks.

If the Federal Reserve raises interest rates too much or too fast, it could tip the economy into recession. She discusses signs that the Fed may be going too far too fast that include a flat or inverted yield curve, a decline in inflation expectations, and tightening credit. At this point, we see only one indicator—the flattening yield curve—that could be signaling an eventual end to the rate-tightening cycle.

Treasuries moved lower following the release of the Fed minutes, as the yield on the 2-year note rose 2 bps to 2.88%, while the yields on the 10-year note and 30-year bond gained 3 bps to 3.18% and 3.36%, respectively. The U.S. dollar also gained ground, aided somewhat by some cooler-than-expected U.K. data, which weighed on the British pound.

Tomorrow’s economic calendar will hold weekly initial jobless claims, predicted to decline by 2,000 to 212,000, as well as the Index of Leading Economic Indicators (LEI), with economists projecting a 0.5% m/m increase for September following the 0.4% rise registered in August.

Europe lower on data, Asia mostly higher following U.S. rally

European equities finished broadly lower after an afternoon reversal amid weakness in automakers following a decisive drop in new car registrations in the region for September. Also, U.K. Brexit uncertainty lingered ahead of a European Union summit later this week as a deadline for a deal looms, while the markets awaited today’s Fed meeting minutes. The markets gave back a bit of yesterday’s rally that came amid some upbeat U.S. earnings and economic data. The euro traded lower as the U.S. dollar gained ground.

The British pound also saw some pressure to likely limit losses for the U.K. markets following some cooler-than-expected U.K. inflation figures that appeared to keep concerns about the Bank of England being more aggressive in check. Bond yields in the region finished mixed, with Italian rates higher even as the nation approved its budget yesterday and it will go to the European Commission for review.

Stocks in Asia finished mostly higher on the heels of the sharp rally in the U.S. yesterday as a host of upbeat earnings and economic reports aided global sentiment, while no new major developments on the trade front likely helped conviction.

Japanese equities rose, with the yen losing some ground on the U.S. dollar, while securities in South Korea and Australia advanced.

Chinese stocks finished to the upside, with stronger-than-expected September lending statistics likely fostering positive sentiment ahead of its Q3 GDP report. However, volume was lighter than usual as Hong Kong markets were closed for a holiday.

Markets in India reversed to the downside to buck the trend, with reports causing a flare-up in lingering banking sector and liquidity concerns.

India’s markets have seen increased volatility amid the aforementioned uneasiness, which has been accompanied by this year’s drop in the rupee, the rally in crude oil prices and festering global worries regarding emerging markets.

Random Thoughts

Since the start of October, the S&P 500 has witnessed a 40% increase in average intra-day volatility, as compared with the first nine months of the year.

Yet, the rolling 12-month count of 1%+ daily price moves is currently 47% below its average since 2000 and 22% lower than the average since 1950.

Not surprisingly, October’s reputation for being a volatile month is justified as it has tallied the greatest percentage of days in which the S&P 500 rose or fell by 1% or more since 1950 at 10.3%, while January, the next highest month, saw a closer-to-normal average of 8.8%.

The bad news is the full decline might not be over. There were 26 calendar years since WWII in which the S&P 500 slipped into at least two round-trip sell-offs exceeding 5%, with the second being deeper than the first in more than two out of three times.

The good news is that we don’t think it will result in a new bear market, since our fundamental outlook remains firm.