STOCKS REBOUND AS EARNINGS SEASON WRAPS UP AND UNEMPLOYMENT STAYS AT 50-YEAR LOW

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Weekly Market Update — November 3, 2018

The major U.S stock markets gave investors a solid rebound this week, adding over 2% across the board
Investors were hoping for a bounce after the sell-off throughout much of October and solid corporate earnings and what appears to be easing trade tensions contributed to the bounce
The small–cap Russell 2000 led the way with a huge jump of 4.3%, followed by a 2.6% gain for the tech–laden NASDAQ and broad–based S&P 500 and a 2.4% move for the blue–chip DJIA
Cyclical sectors performed best on the week, with the Materials sector advancing over 6% and the Financials sector moving 4.4%
Investors welcomed easing tensions with China on trade and President Trump said he had a “long and very good conversation” with China's President Xi
Earnings season is coming to a close as about 75% of S&P 500 companies have reported for the quarter. In aggregate, quarterly profits are currently set to grow at the best pace in eight years
On Friday, another strong jobs report confirmed the continued strength in the U.S. labor market
Treasuries sold–off, pushing yields higher with the sensitive 2–yr yield and benchmark 10–yr yield leaping to 2.91% and 3.21%, respectively
International stocks rebounded as well, with the large-cap, developed international markets (MSCI EAFE) adding 2.7% for the week

Weekly Market Performance

October Skunk

No matter how half-full your glass might be, the reality is that October was just a bad month for stocks, as the market dropped almost 7% and recorded its worst monthly loss since September of 2011, when they fell about 7.2%.

Optimists are quick to point out that following that decline of 7.2% in September 2011, the markets had one of their best months in 20 years with a jump of 10.8% in October 2011, but even the hardiest of optimists wouldn't suggest we will see a similar rally in November this year.

But perspective is always a good thing and the reality is that the markets are simply higher over the past one–, three–, five– and 10–year periods. The S&P 500 is simply back to its summer level and we are only about 7.5% from the all–time high.

October Employment Numbers

The Department of Labor released the October employment report and it showed that the U.S. economy added 250,000 jobs in the month and that puts the labor market at a nearly 50–year low unemployment rate of 3.7%. This should bode well for consumer spending – which is about 2/3 of our GDP – but there will be some concerns that the Fed might need to be more aggressive with rate hikes.

Earnings Season Winds Down

With almost 75% of S&P 500 companies having reported, numbers are mostly impressive – quarterly profits are up 25%, profit margins remain near historical highs, and sales growth is running at the best rate in years.

From FactSet:

78% of S&P 500 companies have reported a positive EPS surprise
61% have reported a positive sales surprise
All eleven 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 15.6. This P/E ratio is below the 5–year average (16.4) but above the 10–year average (14.5)

Economic Data

October nonfarm payrolls increased by 250,000
The prior month's increase was revised to 118,000 from 134,000
Average hourly earnings increased 0.2%
The average workweek was reported at 34.5
The unemployment rate remained at 3.7% in October
The Trade Balance Report for September showed a widening in the trade deficit to $54 billion
Factory orders increased 0.7% in September. Excluding transportation, orders were up 0.4% for the second straight month

Sources

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