Markets ride a roller coaster
November was a roller coaster ride for the markets. They dropped further into correction territory before closing higher by month–end. The S&P 500 and Dow Jones Industrial Average rose by 2.04 percent and 2.11 percent, respectively, while the Nasdaq Composite gained 0.49 percent.
Strong fundamentals for U.S. companies drove this rebound. According to FactSet, with 96 percent of the companies in the S&P 500 reporting (as of November 23, 2018), the blended earnings growth rate was 25.9 percent.
So, what’s the problem?
The problem was confidence, which took a hit in October and early November. All three indices spent most of November below their 200-day moving averages.
The international story was much the same. Developed markets, represented by the MSCI EAFE Index, also fell. But they finished the month down just 0.13 percent. Emerging markets gained 4.13 percent. Both indices are below their 200–day moving averages.
Investment-grade fixed income was the big winner for the month, as rates declined during November’s turbulence. The 10–year U.S. Treasury yield rose to 3.24 percent before falling to 3 percent by month–end. This increase caused the Bloomberg Barclays Aggregate Bond Index to gain 0.60 percent. The high-yield index fell by 0.86 percent on concerns about debt.
Housing sector disappoints
One of the factors that rattled confidence was the housing sector. Low supply, rising mortgage rates, and increasing prices slowed housing sales. New home sales–expected to rise by 4 percent in October following a disappointing September–fell by 8.9 percent.
Home builder confidence dropped from 68 to 60. This decline, combined with the large drop-off in new home sales, indicates that the housing slowdown may be here to stay for some time.
Economy slowing but still growing
A slowdown in September’s spending data was largely offset in October, as effects from Hurricane Florence started to unwind. Plus, October’s retail sales data showed a 0.8-percent monthly gain.
Personal spending rose by 0.6 percent, while income rose by 0.5 percent. These results beat expectations and suggested that September’s slowdown was not permanent.
Although consumers were willing to spend their extra cash, businesses were not as quick to do so. Durable goods orders for October fell by 4.4 percent. We have seen declines in the past two months (see Figure 1). Nonetheless, the growth in the beginning of the year indicates overall investment remains high.
Figure 1. Durable Goods Orders, November 2013–Present
The core durable goods figure, which strips out volatile transportation orders, also declined by more than expected. This decline indicates that overall business investment growth may be slowing as we head into the end of the year.
Both businesses and consumers saw a drop in confidence. But as gas prices fall and with the jobs market healthy, consumer confidence may be set to increase. In fact, 250,000 new jobs were added in October. Unemployment remained at 3.7 percent, and wages grew by 3.1 percent on an annual basis. More jobs and higher wages should help keep the largest sector of the economy solid.
Strong employment and high confidence levels should continue to support consumer spending as we head into the holiday shopping season. Of course, the slowdown in business investment is worth watching. But the large levels of investment we saw early in the year following last year’s tax reform indicate that we are not at worrisome levels yet.
Politics continue to affect markets
The big news was the midterms. On the positive side, as the uncertainty from the elections subsided, we saw a rally in equities. On the negative side, concerns surrounding global growth and a trade war escalation caused global market turbulence midmonth. But at month-end, we had another rally after the postponement of the U.S.-China trade war at the G20 meeting.
Looking forward, politics will continue to create volatility. But absent a change in the fundamentals, the turbulence should be short lived. With a potential government shutdown pending here in the U.S., ongoing concerns in Europe about Italy, and the Brexit negotiations, we need to pay attention but also be mindful that political volatility usually passes quickly.
Markets volatile, but fundamentals remain solid
Political risks will continue to affect markets. But the economy is expanding. Plus, the rebound from the September slowdown is encouraging for fourth-quarter growth.
Of course, markets can experience turbulence. Over the long term, they are a healthy function of the market. A well-diversified portfolio matched with an investor’s time horizon is the best way to ride out volatility and reach financial goals.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.