Broker Check

Stocks Slump Amid Challenging Earnings

October 29, 2018
 
Stocks Slump Amid Challenging Earnings

October 22-26, 2018 Recap

Most Volatile Week Since February. U.S. stocks slumped last week, with the S&P 500 finishing a volatile week just shy of a 10% correction from its September 20 record high as earnings from a pair of mega cap bellwethers in internet search and online retailing disappointed. It was an intense week marked by the largest and biggest price swings since February. The news overshadowed a stronger-than-forecast GDP report showing the strongest back-to-back quarterly growth gains since 2014.

Weekly Performance. For the week, the S&P 500 lost 3.93%, the Dow Industrials fell 2.97%, while the tech-heavy Nasdaq Composite sank 3.78%, its fourth straight weekly decline. Excluding dividends, the Dow Industrials and S&P 500 had both erased their year-to-date gains.

Pleasing GDP Data. The U.S. gross domestic product (GDP) expanded by 3.5% in the third quarter (3Q), topping economists’ growth projections for 3.3%. Moreover, personal consumption also exceeded forecasts (4.0% vs. 3.3%), rising the most since the 4Q 2014. Importantly, a key measure of inflation rose 1.6%, cooling a bit after rising 2.1% in the prior quarter. Meanwhile, the University of Michigan’s final October reading of consumer sentiment fell to 98.6, slightly lower than its preliminary estimate for 99. Despite a monthly decline, consumer sentiment remains near a 14-year high.

Defensive Stocks Perform Best. All 11 major sector groups ended negative last week, with Energy (-7.06%), Industrials (-5.55%) and Financials (-5.23%) down the most. Real Estate (-1.02%), Consumer Staples (-1.36%) and Utilities (-2.13%) were down the least.

Treasurys Rally. Treasurys advanced on Friday and for the week amid a rotation into safer-haven assets, sending the yield on benchmark 10-year Treasury notes down 4.1 basis points on Friday, and off 11.7 basis points during the week ending at 3.076%. The U.S. Dollar Index strengthened by 0.67% last week, ending at 96.359. WTI crude oil futures fell 2.44% during the week, ending at $67.59/bbl. to record a third straight weekly loss.

 What We’re Reading
 

Nasdaq Composite in Correction

China Mulls 50% Auto Tax Cut

Russia Vows Continued High Oil Output

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 Week’s Economic Calendar
 

Monday, October 29: Personal Income & Spending, PCE Prices, Dallas Fed Manufacturing Activity;

Tuesday, October 30: Case-Shiller Home Prices, Consumer Confidence;

Wednesday, October 31: Jobless Claims, Labor Productivity & Costs, Construction Spending, Markit & ISM Manufacturing;

Thursday, November 1: Jobless Claims, Trade Deficit in Goods, Wholesale & Retail Inventories, Durable & Capital Goods Orders, Pending Home Sales;

Friday, November 2: Trade Deficit, Non-farm Payrolls, Unemployment Rate, Durable & Factory Orders.

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 Market Watch
Stocks1-WkMTD3-MonthYTD1-Year
Dow Jones-2.97%-6.69%-3.29%-0.13%5.51%
S&P 500-3.93%-8.67%-5.85%0.98%5.86%
NASDAQ-3.78%-10.90%-8.49%4.67%10.47%
Russell 3000-3.92%-9.22%-6.68%0.38%5.06%
MSCI EAFE-3.87%-9.86%-10.66%-11.16%-8.30%
MSCI Emerging Markets-3.27%-10.27%-13.29%-17.16%-13.17%
Bonds1-WeekMTD3-MonthYTD1-Year
Barclays Agg Bond0.54%-0.34%-0.21%-1.93%-1.17%
Barclays Municipal0.31%-0.41%-0.78%-0.80%-0.26%
Barclays US Corp High Yield-0.70%-1.64%-0.15%0.89%0.93%
Commodities1-WeekMTD3-MonthYTD1-Year
Bloomberg Commodity-1.06%-0.07%0.59%-2.09%0.70%
S&P GSCI Crude Oil-2.44%-7.73%-2.90%11.87%28.42%
S&P GSCI Gold0.58%3.31%0.04%-5.61%-2.66%
Source: Morningstar
Chart of the Week
Rates, High Prices Hurt Housing Affordability
 
View larger image »
 

The U.S. economy is growing at a strong pace, but one area of the economy that has struggled in recent months is housing. New home sales plummeted to a seasonally adjusted annualized rate of 553,000 in September, the lowest reading since December 2016 and the fourth straight monthly decline. Compared to a year ago, new home sales are down 13.4% and the median selling price fell to $320,000, a decline of 3.5% year-over-year. Furthermore, the monthly supply of new homes available for sale climbed to 7.1 months, the highest since March 2011. There is concern that a shift is occurring in the housing market following several years of gains due in large part to strong demand from an improving economy coupled with limited supply.

This year, however, a number of headwinds including elevated home prices in several major metropolitan areas, rising mortgage rates, and a reduction in housing-related tax benefits following the implementation of the Tax Cuts and Jobs Act have slowed housing. All of these headwinds relate to affordability, and therefore we see supply increases as a sign that demand is beginning to wane. We are still supportive of the view that long-term structural tailwinds will benefit housing, but in the near-term, the housing market may experience more weakness until affordability improves in several regions of the country.


 
 
 
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The Bloomberg Barclays US Aggregate Bond Index, which was originally called the Lehman Aggregate Bond Index, is a broad based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included. Eligible bonds must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 8.25 years. This total return index, created in 1986 with history backfilled to January 1, 1976, is unhedged and rebalances monthly.

The Bloomberg Barclays US Corporate High Yield Index measures the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt. Payment-in-kind and bonds with predetermined step-up coupon provisions are also included. Eligible securities must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 6.3 years. This total return unhedged index was created in 1986, with history backfilled to July 1, 1983 and rebalances monthly.

The Bloomberg Barclays US Municipal Bond Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. Many of the subindicies of the Municipal Index have historical data to January 1980. In addition, several subindicies based on maturity and revenue source have been created, some with inception dates after January 1980, but no later than July 1, 1993. Eligible securities must be rated investment grade (Baa3/BBB- or higher) by Moody’s and S&P and have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 12.8 years. This total return index is unhedged and rebalances monthly.

The Bloomberg Commodity Index is a broadly diversified index that measures 22 exchange-traded futures on physical commodities in five groups (energy, agriculture, industrial metals, precious metals, and livestock), which are weighted to account for economic significance and market liquidity. No single commodity can comprise less than 2% or more than 15% of the index; and no group can represent more than 33% of the index. However, between rebalancings, group weightings may fluctuate to levels outside the limits. The index rebalances annually, weighted 2/3 by trading volume and 1/3 by world production.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Introduced in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

The MSCI All-Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The SMCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. The developed country indexes include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the Uninted States. The emerging market country indexes included are: Brazil, Chile, China, Colombia, Czech Republic, Eygpt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

The MSCI EAFE Index is designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted.

The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe.

The MSCI Pacific Index captures large and mid-cap representation across five Developed Markets (DM) countries in the Pacific region. With 470 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 31% of the total market capitalization of the Russell 1000 companies.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

The S&P GSCI Crude Oil Indexis a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the crude oil market.

The S&P GSCI Gold Index a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold futures market.

West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.

The U.S. Dollar Index is a weighted geometric mean that provides a value measure of the United States dollar relative to a basket of major foreign currencies. The index, often carrying a USDX or DXY moniker, started in March 1973, beginning with a value of the U.S. Dollar Index at 100.000. It has since reached a February 1985 high of 164.720, and has been as low as 70.698 in March 2008.