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Market Commentary, November 11, 2018 For the week of November 5, 2018

Key Market Data

10/26/2018 11/02/2018 One Week Change YTD One Year
S&P 500 Index 2,658.69 2,723.06 +2.42% +3.45% +7.59%
MSCI EAFE Index 1,777.76 1,837.05 +3.34% -7.74% -5.77%
Barclays Capital U.S. Aggregate Bond Index 2,006.83 1,992.10 -0.73% -2.65% -2.46%
10-year Treasury Note Rate 3.076% 3.213% +13.7 basis points +80.7 basis points +86.7 basis points

Last week was a tale of two months as the stock market closed out a frightful October but began November with a sharp rebound and a terrific jobs report.

In fact, despite a strong last day for October, it was the worst month in years for the major indexes, mainly because of the tech stock retreat, which continued at the end of last week after Apple reported record earnings and profits but lowered its forecast for fourth-quarter growth. When the dust for October had settled, the tech-heavy Nasdaq had fallen 9.2 percent, its biggest monthly drop since November of 2008; the S&P 500 had lost 6.8 percent, its worst month since September of 2011; and the Dow had dipped 5 percent. Worldwide, according to the S&P Dow Jones Indices, stocks shed $4.5 trillion in October. Last week; however, the major indexes rebounded, with the Dow moving comfortably back above the 25,000-point mark and the S&P 500 gaining 2.4 percent, its best showing since March. The yield on the ten-year Treasury, meanwhile, moved higher as investors shifted from seeking refuge to assuming that the jobs report made another rate hike by the Federal Reserve this year all but certain.

The jobs report

The news about jobs continues to be, as President Trump put it, “tremendous,” and October was no exception. The economy added 250,000 new positions, well above the forecast, and the jobless rate stayed at 3.7 percent, its lowest level since 1969. Best of all, salaries were up 3.1 percent over the past year, the strongest showing since 2009. In addition, the jobless rate remained at 3.7 percent despite the fact 711,000 Americans joined the labor force, and the labor force participation rate rose to 62.9 percent from 62.7 percent. The only downside, as noted, was that investors felt that the report made another rate hike by the Fed likely this year, sending the market down on Friday.

Rising debt

To offset higher government spending and lower tax revenues, the U. S. Treasury Department said it will issue $425 billion in debt in the fourth quarter, bringing the total for the year to $1.338 trillion compared to $546 billion last year. The federal deficit was up 17 percent for the fiscal year that ended on Sept. 30, and the Office of Management and Budget has forecast trillion-dollar deficits for the next four years, starting with the current fiscal year.

Progress on China?

The stock market rose on Thursday after Trump tweeted that he’d had “a long and very good conversation” with China’s President Xi Jinping, raising hopes that the two will still meet on the sidelines at the G-20 meeting in Buenos Aires later this month. However; last week the Department of Justice also charged Fujian Jinhua Integrated Circuit with espionage for stealing technology from Micron, just days after the Commerce Department stopped the same company from buying U.S. components, citing national security. In addition, two Chinese intelligence officers and five hackers were indicted for stealing technology from the aerospace industry. Worse still, the trade imbalance at the heart of the dispute between the two nations hit a new high of $40.2 billion in September, partly because of the decline of the value of the yuan against the dollar; last week China’s central bank set the yuan at its lowest rate against the dollar in a decade. Overall, the trade deficit was up 1.3 percent in September from the month before to $54 billion as imports hit a record high of $267 billion.

Sanctions for Iran

The sanctions against Iran became official today, but eight countries that are major importers of Iranian oil, including India, China, and Japan, have been granted six-month exemptions by the White House. Even before the sanctions became official, Iran’s oil exports, which account for nearly 80 percent of its gross domestic product (GDP), had fallen from 2.5 million barrels a day to 1.5 million. Despite the sanctions, global oil prices continued their recent decline last week because inventories continue to rise and the slowdown in Iran had long since been taken into account by traders.

Merkel to step down

After her party suffered a stinging defeat in elections in the state of Hesse, Germany’s Chancellor Angela Merkel announced that she’ll step down as the leader of the Christian Democratic Union in December and not seek re-election as chancellor during the next scheduled election in 2021. Merkel, the head of her party since 2000 and chancellor since 2005, is widely regarded as the stabilizing force in an increasingly divisive European Union.

In other news, the government said that the Personal Consumption Expenditures (PCE) Price Index rose 0.1 percent in September from the month before; excluding food and energy, PCE inflation advanced 0.2 percent month to month and 2 percent from a year earlier. Consumer spending was up 0.4 percent in September from August and personal income rose 0.2 percent, the smallest gain since June of 2017. The Institute for Supply Management’s (ISM) Manufacturing Index fell to 57.7 percent in October from 59.8 percent in September; any reading above 50 percent indicates expansion. Nonfarm productivity growth slowed to still strong 2.2 percent in the third quarter after hitting a revised 3 percent in the second, but that was still the best back-to-back performance since 2015. Factory orders were up 0.7 percent in September from August’s 2.6 percent gain; orders ex-transportation climbed 0.4 percent and orders for durable goods rose 0.8 percent. Construction spending was unchanged in September from August. The S&P CoreLogic Case-Shiller home prices index fell to 5.8 percent for the year ended in August. The Conference Board’s index of consumer confidence rose to 137.9 in October, its highest point since September of 2000. And first-time jobless claims for the week ending Oct. 27 were up 2,000 to 214,000; the four-week moving average increased 1,750 to 213,750.

A look ahead

Americans will go to the polls tomorrow to vote in the midterm elections with the possibility of the Democrats retaking the House or Senate. The Fed will meet this week on Wednesday and Thursday, but it isn’t expected to raise its benchmark rate again until its last meeting of the year next month. And, in addition to more third-quarter earnings news, this week will see updates on the ISM’s nonmanufacturing index, job openings, consumer credit, the producer price index, wholesale inventories, and consumer confidence.