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Weekly Market Update — November 19, 2018

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STOCKS RETREAT AS TENSIONS OVERSEAS SPIKE AND EARNINGS SEASON WINDS DOWN

  • The major U.S. stock markets retreated this week, as the Consumer Discretionary and Information Technology sectors led the decline
  • The week brought investors a host of noise to digest, including another pull back in oil prices, U.S. and China tensions and now Brexit worries
  • The DJIA and NASDAQ each gave back more than 2.1%, the S&P 500 declined 1.6% and the Russell 2000 lost 1.4%
  • Within the Technology space, Apple had its worst week in seven months as it dropped 5% on the week and is about 16% off its recent high
  • Apple accounted for much of the decline in both NASDAQ and the DJIA as it makes up about 12% of NASDAQ and 5% of the DJIA. It was Apple’s seventh straight weekly loss
  • Amazon shares officially entered bear market territory early in the week as a result of being off over 20% from the all-time high established in late August
  • The oil-sensitive Energy sector dropped 2.1%, driven by the more than 6% drop in WTI crude, which ended the week at just over $56/barrel
  • Consumer prices rose pretty much as expected, which settled fears of inflation rising too fast and interest rates being hiked faster than expected
  • Overseas, a draft plan that outlined Britain’s withdrawal from the EU was presented, but it still needs to be approved by Parliament and things aren’t looking so great


 

Weekly Market Performance

Tensions with China, Saudi Arabia and Brexit Weigh on Markets

Trade worries between the U.S. and China weighed heavily on U.S. investors this week and it was somewhat exacerbated by Brexit worries too. Early in the week, the markets sold-off when reports circulated that the White House was drafting a plan for new tariffs on auto imports, which obviously has big implications for the U.S. automobile sector.

Later in the week markets rose after reports of extensive efforts underway behind closed doors to revive U.S.-China conversations ahead of the upcoming G-20 meeting. Then late in the week, President Trump announced that Chinese officials sent him a list of 142 steps they were willing to take for a trade deal.

In other international news, markets moved down Tuesday, driven partly by President Trump’s sharp rebuke of Saudi Arabia’s suggested production cutbacks. Crude oil prices suffered their worst intraday decline since 2011.

Then on Thursday, a very weak reception to the Brexit deal announced by British Prime Minister Theresa May greeted investors. In fact, Brexit fears increased throughout the week, as British Prime Minister Theresa May unveiled her draft agreement on Britain’s withdrawal from the EU. By the week’s end, May had lost parliamentary support and was trying to hold things together, as her critics were calling for a vote of no-confidence.


Around the World

  • The pan-European STOXX 600 Index fell more than 2%
  • The FTSE 100 Index lost 1.3%
  • The German DAX and French CAC 40 Indexes both finished lower
  • Italy’s FTSE MIB stock exchange fell 2%
  • The Nikkei 225 Stock Average declined 2.6%
  • The broad-based TOPIX Index and the TOPIX Small Index posted losses for the week
  • The Shanghai Composite Index rose 3.1% for the week and the CSI 300 Index (large-cap stocks) added 2.8%


Consumer Prices Tick Up

The Department of Labor announced that the consumer price index showed that inflation inched up slightly higher in October and 2.5% over the past year. For comparison, inflation has run at an average of 1.8% over the past eight years.

The good news is that core inflation – which excludes food and energy – has averaged 2.2% over the past three months – and this is in–line with the Fed’s long–run target of 2%.

Fed Vice Chair Richard Clarida suggested on Friday that the Fed is getting closer to a “neutral rate,” which is somewhat of a departure from Fed Chair Jerome Powell’s comments last month.


Earnings Reports from FactSet

With 92% of the companies in the S&P 500 reporting, 78% of S&P 500 companies have reported a positive EPS surprise and 61% have reported a positive sales surprise. In addition:

  • For Q3 2018, the blended earnings growth rate for the S&P 500 is 25.7%.
  • All eleven sectors have higher growth rates today (compared to September 30) due to positive EPS surprises and upward revisions to EPS estimates.
  • For Q4 2018, 61 S&P 500 companies have issued negative EPS guidance and 27 S&P 500 companies have issued positive EPS guidance.
  • The forward 12-month P/E ratio for the S&P 500 is 15.6. This P/E ratio is below the 5-year average (16.4) but above the 10-year average (14.5).


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