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Stocks Briefly Hit Correction Territory as Volatility Picks Up

#lastweeksforecasttoday

Weekly Market Update - October 29, 2018

  • Stocks endured a very volatile week, with the S&P 500 and NASDAQ briefly touching correction territory – off 10% from their recent highs – before rallying to end the week just out of correction land
  • The DJIA lost 3.0%, NASDAQ lost 3.8%, and the S&P 500 lost 3.9% and the week's drop pushed all but the NASDAQ into negative territory for the year
  • International stocks did just as poorly, with the large-cap, developed international markets (MSCI EAFE) losing 3.5% and registering a 13% drop YTD
  • Trading volumes were very high for most of the week and the CBOE Volatility Index reached a high not seen in months
  • Disappointing earnings reports from Amazon and Alphabet (Google's parent) exacerbated an already shaky market and the FAANG stocks pushed the Communication Services and Information Technology sectors markedly lower on the week
  • Generally speaking, stocks sold off as investors reacted sharply to disappointing earnings reports and the longer-term, forward outlooks from a few very high-profile companies
  • Despite the volatility and negative headlines, corporate earnings are still robust, with earnings growth of about 20% from last year
  • The Department of Commerce reported that the economy grew at 3.5% and this is the second quarter of solid growth and the best consecutive quarterly performance since 2005
  • Consumer prices rose by just 1.6% in the third quarter, below the Fed target of 2%, which is appealing to those worried that the Fed would be more aggressive with its rate hikes

Weekly Market Performance

Benchmarks Enter Correction Territory Briefly

It was another week of sharp declines, as 7 of the past 8 trading days have been in the red. Technically speaking, the S&P 500, NASDAQ and the small–cap indices entered correction territory – down 10% from recent peaks – on Friday morning before jumping back out. The large–cap and narrowly defined DJIA avoided correction territory altogether.

The big drop in the markets this week pushed the S&P 500 and DJIA into negative territory for the year, while the tech-laden NASDAQ is still in the green on the year. Looking at the S&P 500 sectors, the more defensive names like consumer staples, utilities, and real estate performed the best, while energy was the worst performing sector.

Busiest Week in Earnings Season

This past week was the busiest of the quarterly earnings season, with 37% of the companies in the S&P 500 reporting results. And while most of the headlines trended toward the negative, there were some positive surprises too – most notably Tesla, McDonald's, and Ford.

But everyone wanted to talk about Amazon and Alphabet (Google's parent) after both reported a slowdown in revenue growth in the third quarter. Interestingly, very few market pundits talked about how both Amazon and Alphabet exceeded forecasts.

With 48% of the companies in the S&P 500 reporting actual results for the quarter, research–firm FactSet reports that:

  • 77% of S&P 500 companies have reported a positive EPS surprise and 59% have reported a positive sales surprise
  • The blended earnings growth rate for the S&P 500 is 22.5%. If 22.5% is the actual growth rate for the quarter, it will mark the third highest earnings growth since Q3 2010
  • Nine sectors have higher growth rates today (compared to September 30) due to positive EPS surprises and upward revisions to EPS estimates
  • The forward 12–month P/E ratio for the S&P 500 is 15.5. This P/E ratio is below the 5-year average (16.4) but above the 10–year average (14.5)

Across The Oceans

  • The pan-European STOXX 600 Index fell more than 2%
  • France's CAC 40 lost 2.4%
  • The Nikkei 225 Stock Average closed the week 6% lower
  • The TOPIX Index and the TOPIX Small Index have lost 12.2% and 16.0% on the year, respectively
  • The Shanghai Composite Index added 1.9% for the week
  • The FTSE/JSE Africa All Share Index was down 2.4% on the week

Economic Data Released

  • Real GDP increased at an annualized rate of 3.5%
  • Personal spending was up 4.0% – the strongest pace of growth since the fourth quarter of 2014
  • The October reading for the University of Michigan Index of Consumer Sentiment was 98.6, down slightly

Midterm Elections Heating Up

As Midterm elections heat up, investors should consider this from Standard & Poor's

  • Since 1945, the S&P 500 has returned an annualized 11.0% when the same party controlled the White House and both houses of Congress
  • The S&P 500 Index has gained an annualized 7.4% when one party held Congress and the other party held the White House
  • The S&P 500 Index has risen 6.9% annualized when Congress was divided

But here is what might have stock market followers worried: the worst stock market returns have come when the president is a Republican and Congress is divided. Since 1900, the S&P has gained a meager annualized 3.2% during those time periods

But remember: Past Performance is No Guarantee of Future Results.

Sources

sca.isr.umich.edu; conference-board.org;factset.com;cboe.com;imf.org ;sec.gov;federalreserve.gov;commerce.gov;msci.com; standardandpoors.com;nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com