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Weekly Market Update — November 10, 2018

  • The DJIA rose 2.8% this week on the back of a 545–point gain the day after the midterm elections were over, but then pulled back a little on Friday after investors read the latest policy statement from the Federal Reserve
  • The S&P 500 and NASDAQ also moved up on the week, adding 2.1% and 0.7% each while the developed international markets added 1.1% (MSCI EAFE)
  • The midterm elections produced the expected split–Congress as the Democrats took control of the House and the Republicans maintained control of the Senate. Wall Street reacted positively, with the expectation that a divided Congress would neither advance nor repeal current policies – specifically the latest tax cut
  • The Federal Reserve released its policy statement late in the week and decided to leave the fed funds rate unchanged
  • Looking at the S&P 500 sectors, Health Care jumped 4.0%, Real Estate moved up 3.6%, and Utilities gained 3.1%
  • Health care proponents were quick to point out that the Health Care sector has passed the Information Technology sector and Consumer Discretionary sector as the top performing sector so far in 2018 – Health Care is up 12.4% YTD whereas Technology is up 10.7% and Consumer Discretionary is up 10.9%
  • U.S. Treasuries were volatile this week but eventually settled near the previous week's close with the 2–yr yield losing two basis points to 2.91% and the 10–yr yield adding a couple
  • WTI crude lost almost 5% this week as prices have dropped for 10 consecutive days and are down more than 20% from the recent highs reached in early October

Weekly Market Performance

Stocks Jump on Midterm Results

Stocks moved higher on Monday and Tuesday as polls seemed to be confirming that the Democrats would control the House and the Republicans would retain control of the Senate. And when the results were confirmed, the DJIA leapt over 500 points.

The large-cap indexes outperformed the tech-heavy NASDAQ and value stocks outpaced higher-valuation growth shares. Within the S&P 500, the Health Care sector outperformed markedly, possibly on the assumption that much of the remaining Affordable Care Act provisions will remain with a gridlocked Congress. Market historians were quick to tout the fact that stocks have rallied after every midterm election since 1946.

What Correction?

With two weeks of rising prices, the stock market is currently 5% below its all–time high. Eliminating much of late September's and most of October's 10% decline, stock markets jumped each of the past two weeks, including a 545–point gain for the DJIA the day after the midterm elections.

Reviewing the 10% corrections from 2011, 2015 and 2016, it should be no surprise that each of them happened off of record highs. But once the market recovered to within 5% of those highs, the markets proceeded to march forward to additional highs. Whether that happens this time is anyone's guess, but most economists would suggest that fundamentals remain strong — earnings are positive as is the economic climate of low rates and a healthy job market.

The Fed Stands Still

The Fed released its policy statement on Thursday and as expected, left the fed funds rate unchanged. The Fed noted that it expects further rate hikes and Fed–watchers expect a fourth rate–hike in December.

From the Federal Reserve:

“Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12–month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.”

Investors should consider that despite three rate-hikes so far in 2018, at 2.25%, the fed funds rate is still very low by historical standards. In fact, since 1970, short–term rates have only been below the current level from 2001–2004 and 2008–today.

Unemployment Lowest Since 1989

The current U.S. unemployment rate is 3.7%, which happens to be the lowest since 1969. For perspective, consider that unemployment is not far off from the best level since World War II — which was 2.5% in 1953. Further, over the past 40 years — that’s 480 months of unemployment stats — the unemployment rate has spent only 11 months below 4%. Let that sink in.

Economic Data

  • The Producer Price Index jumped 0.6% in October, but excluding food and energy, rose 0.5%
  • The preliminary University of Michigan Index of Consumer Sentiment for November ticked down to 98.3 but remains higher so far in 2018 than in any prior year since 2000.
  • Wholesale inventories increased 0.4% in September