Arrow Created with Sketch. Market Commentary

Market Commentary, October 1, 2018 For the week of October 1, 2018

Key Market Data

09/21/2018 09/28/2018 One Week Change YTD One Year
S&P 500 Index 2,929.67 2,913.98 -0.54% +10.56% +18.34%
MSCI EAFE Index 1,994.06 1,973.60 -1.03% -0.99% +3.81%
Barclays Capital U.S. Aggregate Bond Index 2,010.28 2,013.67 +0.17% -1.60% -1.22%
10-year Treasury Note Rate 3.064% 3.062% -0.2 basis points +65.6 basis points +75.3 basis points

Despite rising interest rates, higher gas prices, and, oh yes, a trade war or two, the United States economy is, in the words of Federal Reserve Chairman Jerome Powell, experiencing a “particularly bright moment.” And that “moment” was reflected by the stock market’s major indexes during the third quarter as the Dow Jones Industrial Average, S&P 500 and Nasdaq all posted record highs and advanced, respectively, 9.6 percent, 7.7 percent and 7.4 percent. In fact, as anyone with a diversified portfolio can attest, the fear of rising interest rates and trade wars has taken a toll on emerging and developed markets, and U.S. stocks are all but alone in having performed in the black so far this year. That economic strength has also impacted U.S. Treasuries and, despite the Fed having raised its rate last week, the yield on the 10-year remained over 3 percent.

The Fed starts to normalize

The Fed met last week and, as expected, raised its interest rate for the third time this year while indicating that it was likely to do so again in December – and three times in 2019. The Fed increased its rate to a range of 2 percent to 2.25 percent, the first time it has been above 2 percent since 2008. At his post-meeting press conference, Powell said that, historically speaking, “these rates remain low,” adding, “The gradual return to normal is helping to sustain this strong economy for the longer-run benefit of all Americans.” Powell also said he wasn’t concerned about rising inflation but did say he was hearing “a rising chorus of concerns from businesses all over the country” about the trade war. President Donald Trump, who has complained about the Fed’s rate hikes, said he was “unhappy” and added, “They are raising them because we are doing so well.”

GDP and earnings

As for the economy, the government’s third estimate for second-quarter growth was unchanged at 4.2 percent. Though a slowdown is expected for the third quarter, the Atlanta Fed’s current forecast is 3.8 percent, above the post-recession average (though down from 4.4 percent on Sept. 19). In addition, FactSet is estimating that third-quarter earnings growth for the S&P 500 will be 19 percent year over year, down from the second-quarter’s 25 percent but still strong by recent standards.

Trade wars – and trade treaties

Trade remained center stage last week, beginning on Monday when the latest round of tariffs from China and the U.S. went into effect; as of now, there’s no sign that the two sides are going to meet and negotiate. In addition, the White House warned the European Union not to trade with Iran once sanctions kick in next month. Appearing at the United Nations, President Trump accused China of intellectual property theft and trying to influence the upcoming midterms, and called Iran a “corrupt dictatorship.” Major progress was made on the trade front, however, as Trump and Japan’s Prime Minister Shinzo Abe said they would work on a new trade agreement. The U.S. also announced that it had completed its revised trade pact with South Korea. And yesterday, facing a U.S.-imposed deadline of midnight, the U.S. and Canada reached an agreement to revise the North American Free Trade Agreement (NAFTA) after 13 months of negotiations.

Keeping the government running, extending tax cuts

The president signed a bill to keep the government running through Dec. 7 and thus avoided the drama of a shutdown before the midterm elections; funding ran out when the fiscal year ended yesterday. And the House passed legislation to extend last year’s tax cuts for individuals; the corporate tax cuts are permanent, but the individual tax cuts are due to expire in 2025. The Senate has indicated it will not address the issue until after the midterm elections.

Musk and Sky TV

It was a busy week for Tesla and its CEO Elon Musk after the Securities and Exchange Commission (SEC) said it was moving to bar him from serving as an executive for any public company for three years because of his Aug. 7 tweet that hinted that his company was going private. Musk was reportedly thinking of taking the SEC to court, but on Saturday the two sides reached an agreement whereby he will step down as chairman for three years but keep his post as CEO. Tesla and Musk will each pay a $20 million fine and the SEC will appoint two independent directors to Tesla’s board. In the wake of the SEC’s announcement, Tesla’s stock plummeted 13.9 percent on Friday. Fox sold its 39 percent stake in Sky TV to Comcast for $15 billion after Fox lost the bidding war to control the company. Because that bidding war drove the price up, the value of Fox’s Sky stock more than doubled. Disney, which signed off on the sale to Comcast, will save as much as $30 billion on its recent bid of $71 billion to acquire most of Fox’s assets.

The price of oil keeps climbing

The week before last the Organization of the Petroleum Exporting Countries (OPEC) and Russia announced they weren’t going to increase production in the near-term and Brent crude rose to close the quarter at $82.72, its highest level in almost four years. So far this year, Brent is up 24 percent and U.S. crude has jumped 21 percent. In other news, consumer spending advanced 0.3 percent in August from July, the slowest pace in six months. Personal income also rose 0.3 percent in August. The Personal Consumption Expenditure (PCE) Price Index rose 0.1 percent from July and was up 2.3 percent over the past year. The Core PCE price, which excludes food and energy, was flat in August but up 2 percent from a year earlier. The S&P CoreLogic Case-Shiller Home Price Index rose 6 percent in July from a year earlier. New home sales climbed 3.5 percent in August from July to a seasonally adjusted annual rate of 629,000; sales were up 12.7 percent from a year earlier. The National Association of Realtors said pending home sales fell 1.8 percent in August from July, mainly because of low inventories. Pending home sales were off 2.5 percent from August 2017. The Conference Board’s Consumer Sentiment Index hit 138.4 in August, its highest level since 2000, and the University of Michigan’s’ final reading for consumer sentiment in September was 100.1, only the third time it has hit triple figures since 2004. Lastly, first-time jobless claims were up 12,000 to 214,000 for the week ending Sept. 22; the four-week moving average climbed 250 to 206,250.

A look ahead

This week’s updates will include the latest on construction spending, the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes, vehicle sales, consumer comfort, the trade balance, orders for durable goods and, on Friday, the jobless rate for September, forecast to fall from 3.9 percent to 3.8 percent.