MARKETS FALL AFTER 10 CONSECUTIVE WEEKS OF GAINS AS GLOBAL GROWTH HEADWINDS COME INTO FOCUS

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Weekly Market Update — March 9, 2019

The major U.S. stock markets fell all five days this week, after climbing for 10 consecutive weeks in one of the best two–month starts to a year in a long time
The S&P 500 and DJIA each lost 2.2%, while NASDAQ shed 2.5% and the small–cap Russell 2000 dropped 4.3%
With a smattering of discouraging news, most of the week's chatter was about global growth headwinds, underscored by cuts in growth forecasts in Europe and China specifically
Nine of the 11 S&P 500 sectors finished lower, with the Energy as well as Health Care sectors dropping the most by losing 3.9%, followed by Industrials which gave back 2.9% on the week
The Real Estate and Utilities sectors were both able to scratch out meager gains of 0.5% and 0.7%, respectively
Major news dampening the global growth story included a weak U.S. non–farm payroll number, cautious statements from the European Central Bank and GDP growth forecast cuts from the OECD, ECB, and China
The U.S. dollar strengthened against other currencies on the week as the U.S. Dollar Index Index rose 0.9% to 97.36
The U.S. Treasury market saw a flight–to–safety which pushed yields lower
The 2–year yield dropped 11 basis points to 2.44% while the 10–year yield dropped 13 basis points to 2.63%
WTI crude lost 0.6% to $56.14/barrel

Weekly Market Performance

U.S. Stock Markets Reverse Course on the Week

U.S. stock markets gave investors a poor start to March as the major market indexes declined on every single trading day this week.

The Russell 2000 Index – a small–cap index – was hit the worst and the tech–heavy NASDAQ recorded its first weekly drop since late December 2018. Volatility, as measured by the CBOE Volatility Index, rose to its highest level since the end of January.

Within the 11 S&P 500 sectors, the Real Estate and Utilities sectors – both typically considered the more defensive and interest–rate sensitive sectors – fared the best as long–term bond yields decreased to their lowest levels since January 1st. The Energy sector turned in the worst performance as oil prices fell again.

With the 4Q2018 earnings season coming to a close, 69% of the S&P 500 companies reported a positive earnings surprise, which is a tad behind the 72% historical average of companies beating consensus earnings over the past 10 years.

U.S. Economic Data Was Mostly Positive

The data reported in the U.S. was generally positive, which was surprising in some areas. Measurements of service and manufacturing activity showed expansion in February and December new home sales rose, which is not at all what most experts were expecting.

The monthly payrolls report from the Department of Labor was somewhat negative, as the Labor Department reported that employers added only 20,000 jobs in February, well below expectations. But glass–half full economists think this number is more of an anomaly and due to a large swing in weather–sensitive employment areas.

From the Employment Situation Report:

February nonfarm payrolls increased by 20,000
Over the past three months, job gains have averaged 186,000 per month
February private sector payrolls increased by 25,000
February unemployment rate was 3.8%
February average hourly earnings were up 0.4%
The average workweek in February was 34.4 hours

In addition, the Housing Starts and Building Permits report for January showed that starts increased 18.6% month-–over–month to a seasonally adjusted annual rate of 1.2 million units and permits rose 1.4% month–over–month to 1.3 million.

Global Challenges to Earnings and Revenues

Research firm FactSet asked the question: “are S&P 500 companies with higher global revenue exposure expected to underperform S&P 500 companies with lower global revenue exposure in terms of earnings growth and revenue growth for Q1 2019?”

FactSet's answer is yes. Here is what FactSet found:

Earnings Impact

The estimated earnings decline for the S&P 500 for Q1 2019 is −3.4%
For companies that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 1.0%
For companies that generate less than 50% of sales inside the U.S., the estimated earnings decline is −11.2%

Revenue Growth Impact

The estimated revenue growth rate for the S&P 500 for Q1 2019 is 4.9%
For companies that generate more than 50% of sales inside the U.S., the estimated revenue growth rate is 6.5%
For companies that generate less than 50% of sales inside the U.S., the estimated revenue growth rate is 0.7%

Sources

standardandpoors.com; bea.gov; bls.gov; commerce.gov; factset.com; sec.gov; federalreserve.gov; dol.gov; msci.com; nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com