Weekly market update

NAVIGATING THE NOISE

Stocks took another leg lower last week as investors continue to focus on the impact of trade/tariffs and the FED’s intentions to keep raising rates.

For the week, the Dow lost 4.4%, the S&P 500 lost 3.77% and the NASDAQ dropped 4.25%.  Year to date the Dow is up .3%, the S&P 500 is up .2% and the NASDAQ is up 1.5%.

U.S. stocks were up double-digits well into 2018 and sailing along nicely until a funny thing happened — they stopped going up and went the opposite direction.

The Vanguard Total Stock Market ETF (VTI) is now down around 20 basis points on the year.  Not only have stocks struggled as of late, but with rising interest rates for most of the year, that means bonds are down too.  The iShares Aggregate Bond ETF (AGG) is down 2% this year.  The only one of the three major asset classes that’s up this year is actually cash.  Granted, cash is not exactly destroying stocks and bonds by any means, but this scenario is rather rare.  Cash hasn’t outperformed both stocks and bonds over the course of a year since 1994. It’s only happened 10 times in 92 years.  Let that sink in….

Something else that has captured investors attention is the growing calls that a recession is just around the corner.  For the record, a recession is defined as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters”. We are nowhere near that – the latest quarter saw GDP growth of 3.5%.  So, for now, we’ll put the fears of a recession on the back burner and let the fearmongers keep jawboning it.

Earnings season is coming to a close and with better than 95% of companies reporting, despite fears of “peak” earnings in Q2 2018, the S&P 500 earnings grew 32.9% year-over-year in the third quarter.  Growth was broad-based with all sectors providing a positive contribution to earnings, and particularly impressive results from the energy, financial and technology sectors.

Have you noticed gasoline prices lately?  Oil was poised to have a very strong year after climbing 20% through Q3, but then it sharply reversed course in October, sliding into bear market territory. What precipitated this U-turn in oil? Earlier this year, the U.S. reinstated sanctions on Iran, sparking supply concerns. As the world geared up for Iran sanctions to take effect in November, the price of oil climbed.

Recently, concerns of undersupply were replaced by oversupply, as the U.S. granted waivers to 8 countries, including China and India, to continue importing Iranian oil, countering the very fears of supply constraints that had boosted oil prices earlier.

While oil prices may recover somewhat from these levels, the bearish environment for oil should restrain inflation, thus keeping the U.S. economy from overheating and reducing the risk of the Fed hiking too aggressively in 2019.

Looking ahead, we have a very busy week on tap.  We will hear from the FED Chair, we will hear from the G20 summit if President Trump and China’s Xi Jinping, General Secretary of the Communist Party of China, will come to the table and call a truce on the trade war.  We will get consumer confidence, which is probably down after the run on stocks as of late.  We will also get the 2nd read on Q3 GDP, new home sales and Personal Consumption Expenditures (PCE).  This is the FED’s preferred read on inflation.

So, a lot of moving parts this week not to mention we will be watching to see if stocks can get back on track, so stay tuned and we’ll keep you posted.

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