- Equity markets were significantly lower in what was a very volatile week
- Investors worried about rising interest rates and tensions with China and the result was the largest weekly loss for the S&P 500 in about 7 months
- The DJIA lost 4.2%, the S&P 500 lost 4.1%, MSCI EAFE lost 3.9% and NASDAQ lost 3.7%
- Although the three U.S. indices are all positive year–to–date, MSCI EAFE – representing developed international markets – is lower by close to 10% on the year
- The International Monetary Fund reduced its 2018 and 2019 global growth outlook to 3.7% from 3.9% due to tensions between the U.S. and China, Brexit, and the new agreement between the U.S., Canada, and Mexico that will replace NAFTA
- The yield on the benchmark 10–yr Treasury, which leapt to a seven–year–high last week, moved between 3.12% and 3.26% before eventually settling at 3.16%
- The yield on the more Fed-sensitive 2–yr Treasury fell four basis points to 2.84%
- The CBOE Volatility Index – the VIX – also knows as the “investor fear gauge,” jumped 40% and hit its highest level since the end of the first quarter
- President Trump blasted the Federal Reserve and suggested that the Fed has “gone crazy” with rate hikes this year, while blaming the Fed for this week's pull back
- The Fed has raised rates three times so far in 2018 and the CME FedWatch Tool places the chances of a December rate hike at 79.7%
Weekly Market Performance
Pullback, Correction, or Crash?
The major U.S. stock markets fell sharply on Wednesday and Thursday and gave investors their worst week since the end of the first quarter. But it’s still worth noting that the market is about 5.7% below its all–time high – so labeling this a “correction” (a move of 10%) or a “crash” is hardly appropriate, despite what the media might print to sell newspapers.
Further, the markets are still healthily in positive territory for 2018 and have returned 35% over the past two years and 46% over the past three. Said another way, the markets are simply back to where they were in the middle of the summer.
With the stock market's historic growth that began in early 2009, many believe this week's pullback may be a healthy thing. Such a drop is not horribly painful, by historical standards, but informed investors will remember that market pullbacks can be beneficial because they can prevent bubbles from forming.
In the most recent sell–off prior to this week, from January 26th to February 8th of 2018, the Standard & Poors 500 Index fell 10.2%. We just crept into correction territory, but since that time, the market rebounded and now trades above its early February level.
Q3 Earnings Season Kicks Off
FactSet is reporting that the S&P 500 is likely to report earnings growth above 20% for Q3, but below the 25% growth reported in the previous two quarters of 2018.
Financial giants Citigroup, Wells Fargo and JPMorgan Chase kicked off the Q3 earnings season on Friday and the results were mixed: Chase and JPMorgan beat bottom–line estimates, but Wells Fargo missed. The financial sector ended the week with a loss of 5.6%.
Next week gets busy as some heavy–weights will report, including Bank of America, Charles Schwab, Morgan Stanley, Goldman Sachs and American Express.
Consumer Sentiment Declines
The preliminary University of Michigan Index of Consumer Sentiment for October came in at 99.0, which indicates a slight decline. From the release issued on Friday:
“Consumer sentiment slipped in early October, although it remained at quite favorable levels and just above the average reading during 2018 (98.5). The small decline was due to less favorable assessments by consumers of their personal finances. Unfortunately, the downward revisions in the rate of growth in household incomes were accompanied by upward revisions in the year-ahead expected inflation rate, weakening real income expectations. It should be noted that the sharp selloff in equities overlapped interviewing by only one evening, having virtually no influence on the early October data.”