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  • November 19, 2018

Week in Review

Week Ending: Friday, November 16, 2018

Recap & Commentary

Markets ended the week lower as a growing sense that earnings are peaking and global economic growth is slowing, infiltrated the markets. In late January and early February, when markets sold off,  strong earnings growth helped them stabilize and rebound. Currently, investors increasingly appear to be discounting the strong earnings growth in the third quarter and expected again in the fourth quarter, and are instead looking ahead to 2019 when earnings growth is expected to slow. Signs of slowing global economic growth are also raising concerns.

Germany’s economy contracted –0.2% in the third quarter, its first quarterly decline since 2015. Weak private consumption and a slowdown in auto manufacturing– a result of German automakers’ cheating on fuel-economy and emissions tests-  weighed on growth.

Similar to Germany, Japan’s economy also contracted in the third quarter, due to the impacts of natural disasters (typhoons and an earthquake) and a decline in exports.  The latter was concerning as it suggested that global trade tensions are impacting growth. More specifically, as China’s third largest trading partner, Japan’s weaker exports suggested continued slowing of China’s economy.

Brexit proceedings appeared to make some incremental progress as PM Theresa May finalized a tentative deal with the European Union. However, after presenting the plan to her Cabinet, six ministers quit in protest, including her Brexit Secretary.  PM May is now facing the real possibility of a vote of no confidence.  Unlike the broad market volatility that followed the original Brexit vote in June 2016, reactions to more recent developments have been confined to the British pound.

 

Economic Bullet Points

Consumer Inflation—Headline CPI rose 0.3% in October, marking the largest monthly gain for the measure since January. Among its underlying subcomponents, increases were fairly widespread with the exception of food prices, which slipped -0.1%.  Year-over-year, headline CPI is up 2.5% compared to 2.0% this time last year, but the YTD rise has moved in-line with consensus and Fed expectations, and rising prices have been offset to a high degree by rising real earnings. Core CPI, which excludes volatile food and energy prices, also rose in October, up 0.19%. However, the underlying trend is only modestly higher which should keep the Fed on course to gradually lift short-term interest rates.

Retail Sales surged a solid 0.8% in October, but after stripping out the more volatile components in the measure such as gasoline and auto sales, control group sales signaled a solid but more modest pace of consumer spending in Q4.

Industrial Production rose a below-consensus 0.1% in October, and the production expectation for December was revised slightly lower, driven by a warm October which sent utility production down 0.5% and slowing M/M mining production.

Small Business Optimism remains near record levels, according to the popular NFIB index, which fell a below-consensus 0.5 points but still hovers only 1.4% off the 45-year record high set in August.

Of Note

Bitcoin, the leading cryptocurrency is down an eye-opening 75% from its all-time high of $19,783.06 set in mid-December last year. Notably, Bitcoin had lost 94% of its value twice during the previous eight years, although those declines occurred when Bitcoin was trading at $0.17 and $1.99, respectively.

 

Market Indices Week of 11/16

S&P 500                    -1.6%

Russell 2000             -1.4%

MSCI EAFE              -1.5%

MSCI EM                    1.0%

Commodities            1.3%

Barclay’s Agg.            0.5%

US Dollar Index        -0.5%

10-Yr Yield                   3.08%

Oil ($/bl)                          $56

Gold ($/oz)                 $1,222

The Week Ahead

  • Housing Market Index
  • Housing Starts
  • Existing Homes Sales
  • E-Commerce Retail Sales
  • Durable Goods Orders
  • Leading Indicators
  • Consumer Sentiment
  • Jobless Claims

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