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Financial Markets Commentary For the week of November 12, 2018

Key Market Data

11/02/2018 11/09/2018 One Week Change YTD One Year
S&P 500 Index 2,723.06 2,781.01 +2.13% +5.73% +9.72%
MSCI EAFE Index 1,837.05 1,840.67 +0.20% -7.50% -5.04%
Barclays Capital U.S. Aggregate Bond Index 1,992.10 1,997.14 +0.25% -2.41% -2.19%
10-year Treasury Note Rate 3.213% 3.183% -3.0 basis points +77.7 basis points +84.1 basis points

Phew.

After what seemed like an interminable run-up to the mid-term elections – a record $5.2 billion was spent on advertising – investors breathed a sigh of relief the day after, with the Dow soaring 545.29 points. They seemed relieved because the Democrats did not take over both chambers of Congress, which could have brought a halt to President Trump’s agenda; because the Democrats did take the House, which will oblige the GOP to compromise; and, perhaps above all, because the elections were finally over. Despite a dip on Friday, the major indexes were up for the second week in a row and safely clear of the recent correction territory they’d fallen into, with the Dow rising 2.8 percent (its best week since March), the S&P 500 2.1 percent, and the Nasdaq 0.7 percent. Before moderating on Friday, the yield on the ten-year Treasury hit a seven-year high after the Federal Reserve again noted the strength of the American economy and seemed on track for its fourth-rate hike of the year when it convenes for its last meeting of 2018 on Dec. 18 and 19.

Oil tumbles into bear territory

Thanks to the combination of record output and projections of reduced global consumption, U.S. crude oil fell into a bear market last Thursday, having dropped 20 percent from its recent high in early October. The price of oil fell again on Friday, falling for the tenth day straight, its worst stretch since 1984. Brent crude was also on the brink of bear territory by week’s end. Meanwhile, members of the Organization of the Petroleum Exporting Countries (OPEC) met with non-OPEC oil producers in Abu Dhabi yesterday and did not cut production but said they would do so if necessary. They next meet on Dec. 6 in Vienna.

The Fed stays on course; stress tests reevaluated?

As noted, the Fed met last week and, as expected, it left its benchmark rate unchanged but also did nothing to dissuade people from expecting a hike in December (and three in 2019). The Fed’s statement noted that the labor market has “continued to strengthen,” and that economic activity “has been rising at a strong rate.” The midterm results could impact the Fed’s policymaking. On Friday, Fed Vice Chairman Randal Quarles told the Brookings Institution he was hoping to ease stress tests for the nation’s largest banks. However, Maxine Waters (D-CA), who has clashed with Trump, is expected to return as the Chairwoman of the House Financial Services Committee and she told The New York Times last week that she wanted to make sure the “big banks” were “providing the services we expect them to provide.”

Mixed signals on China

At the same time that Secretary of State Mike Pompeo was meeting with Chinese representatives to discuss a range of issues, including a meeting between Trump and China’s President Xi Jinping at the upcoming Group of 20 (G-20) meeting in Buenos Aires, Peter Navarro, the president’s trade adviser, was making comments disparaging any progress on the trade front. Without actually saying President Xi’s name, Navarro admonished a “high-ranking member of the Chinese government” for failing to follow through on prior commitments, and also described Wall Street and Goldman Sachs as “unpaid foreign agents” whose involvement in negotiations with China would result in “a stench around any deal consummated.”

Draghi on debt; Italy intransigent

Mario Draghi, the President of the European Central Bank (ECB), once again enjoined eurozone nations to pay down debt while the economy was sound and also said the ECB remained on track to end its quantitative easing program by the end of this year. The ECB’s latest forecast is for gross domestic product (GDP) growth of 2.1 percent this year, after 2.4 percent in 2017, followed by 1.9 percent in 2019, and 1.7 percent in 2020. The European Union (EU) said that Italy’s growth estimates were too optimistic, and its deficit would hit 2.9 percent in 2019, not the 2.4 percent forecast by the Italian government, and move above 3 percent in 2020. The EU recently rejected Italy’s budget plan and asked it to submit a new one by Nov. 13, but Italy has given no indication that it will comply.

Amazon splits the prize; a new chairman for Tesla

It now appears that the new Amazon headquarters that cities across the United States have been jockeying for will be split between two locales: Queens, New York, and Crystal City, near Arlington, Virginia. Tesla announced that Robyn Denholm, the CFO of Australia’s Telstra, will be named chairman of the board. She will be given the job of managing her predecessor Elon Musk, who was forced to step down from that position as part of his settlement with the government over misleading tweets concerning Tesla going private.

Still more jobs

In yet another sign of the strength of the jobs market, the government said that the number of jobs exceeded the number of workers by more than one million as of the last day of September – there were 7.01 million job openings and 5.96 million people actively looking for work. Prior to March, the number of openings had never exceeded the number of candidates in the seventeen years of the survey, and now it’s happened for six consecutive months. In other news, the Institute for Supply Management’s Non-Manufacturing Index fell to 60.3 percent in October from September’s 61.6 percent; the latter figure was the highest since the index was created in 2008. Consumer borrowing rose by $10.9 billion in September the Fed reported, down from $22.9 billion in August. Wholesale inventories were up 0.4 percent in September from the month before; inventories ex-petroleum products gained 0.2 percent. The Producer Price Index (PPI) surged 0.6 percent in October from September and was up 2.9 percent over the last year; PPI ex food and energy climbed 0.5 percent for the month and 2.6 percent for the year. And first-time jobless claims for the week ending Nov. 3, fell 1,000 to 214,000; the four-week moving average dipped 250 to 213,750.

A look ahead

This week’s updates will include the latest on small business optimism, the Consumer Price Index, retail sales, business inventories, and industrial production and capacity utilization.