MARKETS DROP AS CHINA TALKS GET HEATED AND VOLATILITY SPIKES

#lastweeksforecasttoday

Weekly Market Update — May 11, 2019

The U.S. and developed international markets all dropped this week, fueled by the U.S – China trade uncertainty which came roaring back to unsettle the markets once again
NASDAQ lost 3.0%, the S&P 500 declined 2.2% and the narrowly defined 30–stock DJIA dropped 2.1%
The MSCI EAFE Index lost more than the major U.S. indices as it declined 3.1% and the small–cap Russell 2000 declined 2.5%
Every single one of the 11 S&P 500 sectors finished lower with the Information Technology sector declining the most with a 3.6% drop, followed by the Materials and Industrial sectors which each lost 2.8%
The Philadelphia Semiconductor Index lost 5.9% on the week
The week started on a good note as the markets were close to all–time highs before President Trump said he was going to increase the tariff rate on $200 billion of Chinese imports to 25% from 10% if a trade deal was not finalized
China said they would of course retaliate, but then they sent their chief negotiator to Washington to continue trying to hammer out a trade deal
The trade spat sent the CBOE Volatility Index soaring to 23.88, almost double last week's level, but by the end of the week it came to rest at 16.04
Uber finally debuted with its IPO and the results were not good
The 2–yr yield declined eight basis points to 2.24% and the 10–yr yield declined six basis points to 2.47%

Weekly Market Performance

U.S. and China Talks Get Tense

Trade and tariff tensions took center stage all week and led to the largest drop in the markets so far this year. Weekly results might have been worse, but statements from both sides on Friday helped ease investor concerns and brought the markets back a little bit.

In short, the U.S. and China still don't have a trade deal and according to U.S. negotiators, China changed some previously agreed–upon terms just recently. So, President Trump announced that the U.S. would raise tariffs to 25% from 10% on $200 billion in imports from China on Friday May 10 – and we did. Further, the President proposed increasing tariffs to 25% on another $350 billion in imports.

As expected, China vowed to retaliate with their own tariffs and the markets took all of this back and forth negatively.

Uber Debuts and It Was Not Good

Uber had its long–awaited IPO and raised $25 billion, but it fell way short of expectations from just a few weeks ago. In fact, last month Uber’s valuation estimates were between $90 and $120 billion, far short of the $76 billion debut valuation this week.

And making things worse, according to University of Florida professor Jay Ritter, Uber's more than 7.5% decline makes it “bigger than first day dollar losses of any prior IPO in the U.S.”

Earnings, Earnings, Earnings

As of Friday, 90% of the companies in the S&P 500 have reported actual results for Q1 2019 and it's been a good earnings season. And more than 76% of those companies have reported actual earnings–per–share above the five–year average, which helps explain the markets YTD.

More from the research firm FactSet's Friday news release:

In aggregate, companies are reporting earnings that are 5.5% above the estimates, which is also above the five–year average.
In terms of sales, the percentage of companies (59%) reporting actual sales above estimates is equal to the five–year average.
Six sectors are reporting year–over–year growth in earnings, led by the Health Care and Utilities sectors.
Five sectors are reporting a year–over–year decline in earnings, led by the Energy, Information Technology, and Communication Services sectors.
The blended revenue growth rate for Q1 2019 is 5.3% today, which is slightly above the revenue growth rate of 5.2% last week.
Nine of the 11 sectors are reporting year-–over–year growth in revenues, led by the Health Care and Communication Services sectors.
Two sectors are reporting a year–over–year decline in revenues, led by the Information Technology sector.
The forward 12-month P/E ratio is 16.5, which is equal to the five–year average but above the 10–year average.
During the upcoming week, nine S&P 500 companies (including 2 Dow 30 components) are scheduled to report results for the first quarter.

Sell in May and Go Away? Really?

“Sell in May and go away” is a trading adage that counsels investors to sell their stocks in May to avoid a seasonal decline in the stock market. But where did this “Sell in May and go away” advice originate? Not on Wall Street, but rather in London's financial district.

The original saying, “Sell in May and go away, come back on St. Leger's Day” refers to a horse race. The St. Leger Stakes is one of England's greatest horse race and is run in late September. London traders would sell their shares, enjoy their summer, and return to the market after the St. Leger race.

But besides being unwise to base an investment strategy on a horse race, investors should also know that:

2018 Didn't Work. Looking at the S&P 500 from November 1, 2018 through April 30, 2019, the S&P 500 returned 7.97%.But if you sold out of equities in May 2018, only to get back in on November 1, 2018? Well you would have missed the S&P 500 returning 3.71%.
2017 Didn't Work. Looking at the S&P 500 from November 1, 2017 through April 30, 2018, the S&P 500 returned 2.33%.

But if you sold out of equities in May 2017, only to get back in on November 1, 2017? Well you would have missed the S&P 500 returning 7.83%.

In other words, if you employed that strategy in 2017 and 2018, you would have left money on the table. Bad horses.

Sources

factset.com; cboe.com; statista.com.com; standardandpoors.com; nyse.com; sec.gov; federalreserve.gov; msci.com; nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com