Monthly Market Insights | November 2018
Stock prices took investors on a volatile ride in October as interest rates, global economic health concerns, and a smattering of disappointing corporate earnings reports dominated trading.
The Dow Jones Industrial Average dropped 5.1, percent while the Standard & Poor’s 500 Index lost nearly 7 percent. The NASDAQ Composite fell 9.2 percent.1
The month started out strong on news that Canada would be joining Mexico and the U.S. in a revamped trade agreement. But investor enthusiasm quickly faded as rising interest rates sent stocks lower.
Magnitude and Speed
While higher interest rates were expected, the magnitude and speed of the rate increase caught many investors by surprise. The flight from equities accelerated on signs of slowing global economic growth and more trade concerns with China.
Market sentiment turned positive mid-month on strong economic data, but again quickly faded. Waves of selling in late October were fueled by tepid 2019 guidance in key earnings reports. At one point, the Dow Jones Industrials and S&P 500 turned negative for the year, and the NASDAQ Composite entered correction territory.
Stocks staged a powerful rally in the final two days of the month with a string of solid earnings releases, giving some relief to wary investors.
Focus on Guidance
Corporate earnings reported in the third quarter have been exceeding expectations. But investors have been looking for economic clues in the companies issuing negative 2019 guidance.
With 48 percent of the S&P 500 companies reporting earnings, 77 percent of those have reported a positive earnings surprise, and 59 percent a positive sales surprise.2 But through October, 26 S&P 500 companies issued negative earnings guidance for 2019, compared with 15 who have guided forecasts higher.3
Utilities (+3.19 percent) and Consumer Staples (+2.97 percent) were the two bright spots during the month. Communication Services (-7.94 percent), Consumer Discretionary (-11.24 percent), Energy (-11.87 percent), Financials (-6.02 percent), Health Care (-6.90 percent), Industrials (-11.54 percent), Materials (-10.41 percent), and Technology (-10.14 percent) ended the month lower. Real Estate was flat (-0.25 percent).4
What Investors May Be Talking About in December
In recent weeks, the U.S. has signed new trade agreements with South Korea, Canada, and Mexico, while working on trade talks with the European Union. The agreements have been a welcome relief to businesses and investors, but the trade dispute with China remains unresolved.
The trade stalemate has been a persistent worry overhanging the market. Rising interest rates were a factor behind the market’s October drop, but concerns about global economic growth related to trade issues has also contributed to the sudden reversal in sentiment.
It’s uncertain if these recent trade deals will help negotiations with China. Some believe that the elimination of multiple parallel trade negotiations will benefit U.S. interests as the economic impact of tariffs begin to weigh on China’s economy.
On the other hand, China may not feel especially pressured anytime soon, since it has a number of tools to help offset the impact of tariffs, including fiscal and monetary stimulus. Investors may start watching decisions by China’s economic policy-makers for indications of how deeply the country may dig in its heels.
Meanwhile, investors shouldn’t lose sight of the potential impact of the higher costs of Chinese imports on American consumers, which may factor into corporate profits.
The stock market drop in the U.S. was mirrored in overseas markets, with the MSCI-EAFE Index slumping 9.4 percent.5
European markets battled global headwinds as well as those closer to home, including Italy’s budget standoff with the European Union, the Brexit negotiations, and the potential leadership change confronting Europe’s biggest economy (Germany).
Major markets struggled, with Germany dropping 6.5 percent, France falling 7.3 percent, and the U.K. sliding 5.1 percent.6
Stocks in the Pacific Rim countries also struggled as Australia fell 6.1 percent, Japan 9.1 percent, and Hong Kong 10.1 percent.7
Gross Domestic Product
The economy grew 3.5 percent in the third quarter, powered by the most robust consumer spending uptick in almost four years. GDP growth was dampened by weak business investment and a drop in exports.8
The number of net new jobs rose by the lowest amount in a year, with nonfarm payrolls increasing by 134,000. Despite the slowdown in hiring, the unemployment rate fell from 3.9 percent to 3.7 percent, touching lows not seen since 1969. Wage growth remained subdued, staying under three percent year-over-year.9
Spending by Americans in September rose 0.1 percent, which was under economists’ consensus expectations for a 0.7 percent rise.10
Output by the nation’s factories, mines, and utilities rose 0.3 percent, the fourth-consecutive month industrial production has increased. Industrial output was up 5.1 percent over September of 2017.11
Housing starts declined 5.3 percent as rising borrowing costs and higher home prices dampened new construction. Despite the recent stretch of weakness, housing starts are 6.4 percent higher in the first nine months vs. the same period last year.12
Purchases of new homes fell 5.5 percent in September. Sales through the first nine months are modestly higher, up 3.5 percent, compared to the same period in 2017.13
Existing homes sales fell 3.4 percent, as lower inventory, higher mortgage rates, and reduced tax benefits of homeownership continued to weigh on the housing market.14
Consumer Price Index
Consumer prices showed little sign of inflationary pressures, rising just 0.1 percent in September. Year-over-year, the Consumer Price Index increased 2.3 percent, representing the smallest 12-month jump since February.15
Durable Goods Orders
Defense-related orders drove durable goods orders to a 0.8 percent jump in September, bringing the year-to-date increase to 8.9 percent compared to the same period last year.16
Minutes from the Fed’s September meeting showed debate among members over interest rate policy. Some believed interest rate hikes should be accelerated to cool down a potentially overheated economy. Others argued that rate hikes should only occur after appropriate signs have emerged.
The consensus was to raise the federal funds rate in September, with a likelihood of one more rate increase before the end of the year. The Fed has two more meetings on the 2018 calendar -- the first ends November 8th and the other on December 19th.
Fed Chair Jerome Powell has stated that he believes interest rates are still considered accommodative for economic growth, with more hikes necessary until rates became a more neutral factor to growth.17
By the Numbers
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
Investing involves risks, and investment decisions should be based on your own goals, time horizon and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
Any companies mentioned are for illustrative purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance.
The forecasts or forward-looking statements are based on assumptions, may not materialize and are subject to revision without notice.
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.
International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.
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Copyright 2018 FMG Suite.
1. The Wall Street Journal, October 31, 2018
2. FactSet Research Systems, Inc., October 26, 2018
3. FactSet Research Systems, Inc., October 26, 2018
4. FactSet Research Systems, Inc., October 31, 2018
5. MSCI.com, October 31, 2018
6. MSCI.com, October 31, 2018
7. MSCI.com, October 31, 2018
8. The Wall Street Journal, October 26, 2018
9. The Wall Street Journal, October 5, 2018
10. The Wall Street Journal, October 15, 2018
11. The Wall Street Journal, October 16, 2018
12. The Wall Street Journal, October 17, 2018
13. The Wall Street Journal, October 24, 2018
14. The Wall Street Journal, October 19, 2018
15. The Wall Street Journal, October 11, 2018
16. The Wall Street Journal, October 25, 2018
17. The Wall Street Journal, October 17, 2018
18. Environmental Protection Agency, 2015. Most recent data available.
19. Esbnyc.com, 2018
20. TheBalanceSMB.com, April 27, 2018
21. National Geographic, July 19, 2017
22. RubiconGlobal.com, November 14, 2017
23. Bank of America, 2018
24. AluKnowledge.com, March 20, 2017
25. EPA.gov, 2018
26. Statista.com, March 2017