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Market Commentary, October 8, 2018 For the week of October 8, 2018

Key Market Data

09/28/2018 10/05/2018 One Week Change YTD One Year
S&P 500 Index 2,913.98 2,885.57 -0.97% +9.52% +15.25%
MSCI EAFE Index 1,973.60 1,927.14 -2.35% -3.31% +0.85%
Barclays Capital U.S. Aggregate Bond Index 2,013.67 1,994.67 -0.94% -2.53% -2.10%
10-year Treasury Note Rate 3.062% 3.234% +17.2 basis points +82.8 basis points +88.5 basis points

For those who thought investing was a snap, last week offered a timely reminder of just how complicated it can be. Early in the week, positive economic news, notably the trade deal with Canada, sent stock prices up – the Dow hit a new high on both Tuesday and Wednesday. But bond yields also rose as investors moved away from the safety of Treasurys, and by the end of the week the prospect of higher interest rates, driven by rising yields, sent the Dow tumbling, while the Nasdaq registered its worst weekly showing since March, off 3.2 percent. The price of oil was equally volatile, rising to a four-year peak because of the impending sanctions on Iran, then falling sharply back on Friday as U.S. inventories continued to increase. In sum, for the short-term, anyway, volatility is back.

The week began with the United States and Canada having reached a deal late Sunday night to keep the North American Free Trade Agreement (NAFTA) alive. The pact, which has the unwieldy name of the United States–Mexico–Canada Agreement (USMCA), leaves much of the original NAFTA in place, but it also gave the United States some access to the long-protected and subsidized Canadian dairy market, offered further protections and incentives for cars to be made in North America, and brought an end to the prospect of punitive tariffs on Canadian cars and car parts. Canada also won its battle to retain an independent resolution panel to adjudicate disputes over tariffs. The deal was also seen as a step forward in the trade war with China because, as The New York Times noted, President Trump “is methodically settling his multifront trade war to fight a single enemy: China.” The deal did not, however, address the tariffs on Canadian steel and aluminum that are already in place. The USMCA is expected to come before Congress next month, and the U.S. Trade Representative Robert Lighthizer said, “I think this will pass with a substantial majority. The fact of the matter is, this is not a Republican-only agreement.”

Powell’s positive assessment – and plenty of supporting data

That was far from the only good news about the American economy last week. On Wednesday, the Federal Reserve’s Chairman Jerome Powell said we were experiencing “a remarkably positive set of economic circumstances,” adding that it could continue, “effectively, indefinitely.” And there was plenty of evidence to back him up. For example, the Institute for Supply Management (ISM) said its Non-Manufacturing Index rose to 61.6 in September, the highest reading since 1997. The ISM’s Manufacturing Index fell to 59.8 in September from August’s 61.3, which was the highest reading since 2004. Bloomberg’s Consumer Comfort Index climbed to a seventeen-year high of 61.6. And Automatic Data Processing, Inc. (ADP) said private companies added 230,000 jobs in August, well above the estimate of 185,000 and July’s 168,000. Then on Friday, the Labor Department reported that the jobless rate had fallen from 3.9 percent to 3.7 percent in September, its lowest level since 1969 when hundreds of thousands of potential workers were fighting in Vietnam. Though only 134,000 jobs were added, well below the forecast, the estimates for July and August were revised up by 87,000; the 2018 monthly average is now 208,000 new jobs a month compared to 182,000 in 2017. In addition, jobs have now been added every month for eight years, doubling the old record. Wages, however, continued to remain below expectations, rising 2.8 percent from a year earlier compared to 2.9 percent in August, though that was the biggest gain since 2009.

Bond yields continue their recent rise

The yield on the ten-year Treasury has been steadily climbing because of upbeat news about the American economy, and last week it closed at 3.23 percent, its highest level since 2011 (the two-year hit its highest mark since 2008). However, the side effect of rising yields is likely to be higher borrowing costs for consumers and businesses, which led to the late-week selloff of companies that will be hardest hit by higher interest rates.

The two takes on oil

As noted, the impending U.S. sanctions on Iran are already taking a toll on its oil output – and pushing up prices. However, there are two different takes on oil production that have led to the recent sharp swings in pricing. On the one hand, the sanctions on Iran and disruptions in Venezuela, Libya, Iraq, and Nigeria, have led to concerns about a shortage that the Organization of the Petroleum Exporting Countries (OPEC) can’t compensate for with increased output; thus, the highest per-barrel prices since 2014. On the other hand, the United States continues to increase its output, and some believe that, with OPEC’s help – Saudi Arabia announced last week that it will pump more oil – there will be more than enough oil to make up for any shortfall; thus, the decline of almost 3 percent on Friday.

California mandates women on boards; changes for Amazon, GE and Ford

California became the first state to require publicly traded companies headquartered in the state to have, depending on the company’s size, at least one woman on their board by the end of 2019 or face a fine. Amazon said it is raising the minimum wage for its workers to $15 an hour next month, a step that will cover more than 250,000 full-time employees and 100,000 seasonal workers. In a surprise move, GE announced that it was replacing CEO John Flannery after just over a year on the job, bringing Larry Culp, a board member since April, on as the new chairman and CEO. And Ford said it was “reorganizing our global salaried workforce” and letting go an as-yet-undisclosed number of workers.

May survives… and dances

Despite challenges at the Conservative Party’s annual conference, Britain’s Prime Minister Theresa May kept her job after defending her Brexit plan, calling for unity and performing an intentionally awkward dance to ABBA’s “Dancing Queen.” In other news, despite the new tariffs, the U.S. trade deficit widened in August, up 6.4 percent from July to $53.24 billion. Construction spending rose 0.1 percent in August from the month before. Factory orders increased 2.3 percent in August from July, mainly because of a 53 percent jump in orders for aircraft and parts; factory orders ex-transportation were up just 0.1 percent. And first-time jobless claims for the week ending Sept. 29 fell 8,000 to 207,000; the four-week moving average rose 500 to 207,000.

A look ahead

This week’s updates will include the latest on small business optimism, the producer and consumer price indexes, wholesale inventories and consumer sentiment.