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Financial Markets Commentary For the week of October 29, 2018

Key Market Data

10/19/2018 10/26/2018 One Week Change YTD One Year
S&P 500 Index 2,767.78 2,658.69 -3.94% +0.98% +5.84%
MSCI EAFE Index 1,849.37 1,777.76 -3.87% -10.75% -7.82%
Barclays Capital U.S. Aggregate Bond Index 1,995.99 2,006.83 +0.54% -1.93% -1.17%
10-year Treasury Note Rate 3.193% 3.076% -11.7 basis points +67.0 basis points +61.4 basis points

When investors are inundated with conflicting news and numbers, the stock market often suffers the consequences – and that was certainly the case last week. Whether it was the latest on interest rates, earnings, China’s slowdown, Italy’s defiance or the upcoming midterm elections, investors were left reeling, and by week’s end the major indexes had either fallen into the red for the year or were in, or near, correction territory – a 10 percent drop from a recent high (which last happened in February). The unsettling stories about pipe bombs and then, on Saturday, the tragedy in Pittsburgh, did nothing to shift the tone of uncertainty.

The Nasdaq was down 3.8 percent for the week after dropping 4.4 percent on Thursday, its worst day on a percentage basis since 2011. The index also slipped into correction territory as the shares of Netflix, Amazon, Alphabet, Facebook and Microsoft all dropped at least 5 percent on Thursday. Even so, given its bullish run so far in 2018, the Nasdaq remained in the black for the year. However, despite a strong rebound on Thursday, Friday’s drop left the Dow and the S&P 500 down for 2018, with the latter also flirting with a correction. Even more unsettling for investors, volatility was the norm last week, with the Dow’s 608.01 point plummet on Wednesday followed by a gain of 401.13 points on Thursday.

Q3 earnings

Although earnings for the third quarter are expected to be up a lofty 20 percent from the year before, a number of qualified reports, which included warnings about slower sales and higher prices, took their toll on the stock market last week, most notably the news from Caterpillar, 3M, Harley Davidson, AT&T, Alphabet and Amazon. Amazon, in fact, is no longer a trillion-dollar company, its market value having fallen to $800 billion.

The president and the Fed, continued

President Trump continued to question the Federal Reserve’s plans to raise its benchmark rate, telling The Wall Street Journal that the biggest risk to the economy was “to me, the Fed.” He added, “Every time we do something great, he [Chairman of the Federal Reserve Jerome Powell] raises interest rates,” complaining that Powell “almost looks like he’s happy” about it. Meanwhile Raphael Bostic, the President and CEO of the Federal Reserve Bank of Atlanta, said he would continue to support raising rates toward a neutral policy “unless the data talk me out of it.”

Q3 GDP

The most relevant economic data for the Fed to peruse last week was the government’s advance estimate for third-quarter GDP. Though growth came in at a solid 3.5 percent, some saw warning signs in the numbers because the bulk of that growth was the result of higher spending by consumers and the government but not by businesses, despite the recent corporate tax cuts. In addition, exports, likely hurt by tariffs, fell 3.5 percent, and there was little sign of relief on that front as the government’s preliminary reading for the goods trade balance in September was $76 billion, the largest imbalance on record. Still, consumer spending, which accounts for more than two-thirds of GDP, was 4 percent, the highest figure since the last quarter of 2014. And, following GDP expansion of 4.2 percent in the second quarter, there’s a good chance that growth will come in over 3 percent on an annual basis for the first time since 2005.

Italy digs in

Italy and the European Union (EU) were at odds last week after the EU rejected Italy’s budget plan for 2019 which would run a deficit of 2.4 percent, saying Italy was “openly and consciously going against commitments made;” the projected deficit was three times what the previous Italian government had agreed to. Italy’s populist government, which was elected on a platform that included resistance to the EU, has so far refused to give ground. And unlike the budget showdown with Greece, which eventually compromised with the EU, Italy’s economy is the continent’s third largest after Germany and France, and the governing coalition presumably has more leverage to push back against Brussels.

Relief for Puerto Rico?

Puerto Rico’s bond prices rose after the federal oversight board managing its bankruptcy released a plan to handle the commonwealth’s debt and also address GDP growth and post-hurricane recovery. The board is trying to help Puerto Rico, which filed for bankruptcy protection in May of 2017, negotiate a deal to manage the billions in debt held by hedge funds.

New home sales tumble

In other news, new home sales fell for the fourth month in a row in September, off 5.5 percent to 553,000; sales were down 13.2 percent year over year. Inventory rose to 7.1 months’ supply, the highest total since 2011, which could help bring home buyers back into the market despite rising mortgage rates. The National Association of Realtors reported that its Pending Home Sales Index was up 0.5 percent in September to 104.6, though sales were off 3.4 percent from a year earlier, the fifth month straight for annual decreases. Retail inventories were down 0.1 percent in September from August. The University of Michigan said its Consumer Sentiment Index was 98.6 for October compared to an initial reading of 99, but remained near a fourteen-year high. And first-time jobless claims for the week ending Oct. 20 rose 5,000 to 215,000; the four-week moving average was unchanged at 211,750.

A look ahead

This upcoming week will be a busy one for economic updates, including the latest on personal consumption expenditures, the S&P CoreLogic Case-Shiller home price index, nonfarm productivity, construction spending, the Institute for Supply Management’s Manufacturing Index, vehicle sales, the trade balance, orders for factory, durable, and capital goods, and, on Friday, the jobless rate for October, expected to remain unchanged at 3.7 percent. In addition, both Apple and Facebook will release their third-quarter earnings reports.