Weekly market update
The major indices are coming off their best quarter in five years thanks to strong economic growth and strong earnings, which helped investors through all of the tensions surrounding trade and rising interest rates.
Trade disputes between the U.S., Canada, Mexico, Europe and China were the top headlines for most of 2018 as investors try to assess how protectionist policies would impact the global economy and corporate profits.
The FED raised rates for the third time this year. Typically, in this type of rising interest rate environment you would see outperformance by the financials, but as the FED was raising rates and the short end of the yield curve was rising, we saw the long end of the yield curve falling and that created a very flat yield curve unlike we have seen in a very long time.
For the quarter, the S&P 500 rose 7.2% followed by the NASDAQ that rose 7.1%, but it was the Dow that posted the best quarter—up 9.3%. Following this strong quarter, the Dow has risen YTD 8.83%, the S&P 500 10.56% and the NASDAQ a walloping 17.48%.
The best performing sector was health care which was up 14.1%, then industrials and tech—9.7% and 8.5% respectively.
Investors cheered stronger than expected quarterly earnings where we saw earnings for Q2 rise 25% and 77% of S&P 500 companies topped expectations. We got some big positive surprises from an unlikely source—bricks and mortar retailers who rose from the dead and posted one of their best quarters in a couple of years. But on the flip side, big tech names offered a bit of a disappointment, especially when it came to forward guidance.
Despite not being all positive, economic data reaffirmed the notion that the U.S. economy remains on solid footing. Of note, real personal spending rose 0.2% in August. The latest read on Q2 GDP was standing at 4.2%, the best we have seen in several years. Not only did they raise rates, but they also changed the language in their latest statement—they removed the term “accommodative” from their policy statement. This means that monetary policy has now moved more into the neutral territory. The decision, which was expected, is a sign of increased confidence in the US economy.
Consumer confidence is running at all-time highs, we just got the best Richmond FED manufacturing survey since 2000 and a strong durable goods headline number which masked the weak business spending. Tariffs and trade issues are holding back investment decisions at many companies, but if you don’t spend on technology, your competitors will…
Finally, on the economic front—jobs! We keep seeing solid jobs growth despite the concerns around trade, and unemployment is running at multi-decade lows. This only adds to consumer’s high confidence levels.
Across the ponds, European and Asian markets turned in a mixed bag of results. The quarter didn’t start out well for their stock markets, thanks to the strength in the U.S. Dollar and ongoing trade disputes, but finished the quarter in solid fashion. One key takeaway from the international markets is that we began the year in what was called synchronized global growth, but the economies in Europe and Asia have since decoupled. Growth in many of these markets has slowed much more than here in the U.S.
So, what do we want to be watching heading into Q4?
The very first thing on our radar will be earnings and guidance. This past quarter, we saw strong earnings numbers, but the strong guidance wasn’t there and this was due to concerns on how the trade issues would resolve. Those issues lingered through Q3, so we still may have some inferences during earnings season, especially for companies doing business abroad.
As of this writing, we learned that the U.S., Mexico and Canada have come to an agreement on a North American trade deal. Say goodbye to the North American Free Trade Agreement and hello to the U.S.-Mexico-Canada Agreement, President Trump’s “wonderful new trade deal”. Investors showed their reactions by sending stocks soaring.
Also, on my radar is the lack of participation for small caps and the tech-heavy NASDAQ. The Russell 2000 set fresh new highs in August, along with a number of other indices, but they have sat out the rally we had in September. I am okay with them taking a breather, but we need them to get back in the game. The NASDAQ was on a similar path during September as well. Once again, we need them to get back in the game.
We urge you to stay tuned and we’ll keep you posted. If you have any questions, comments or concerns about any of these issues and how they impact your investments, please raise your hand and let us know.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
October 2, 2018
