The Market Update
The Markets - November 12th, 2018
U.S. Markets: U.S. stocks ended the week higher but gave back a portion of their gains on Friday. Large cap indexes outperformed both the technology-heavy NASDAQ Composite index and smaller-cap benchmarks. The Dow Jones Industrial Average surged 718 points or 2.8% to end the week at 25,989. The NASDAQ Composite rose 0.7% closing at 7,406. By market cap, the large cap S&P 500 rose 2.1%, while the S&P 400 midcap index added 1.1%, and the struggling small cap Russell 2000 managed just a 0.1% gain. The Russell 2000 is on the verge of what traders call a “death cross”, which occurs when the shorter-term 50-day moving average crosses beneath the longer-term 200-day moving average.
Data as of 11/11/18
Standard & Poor's 500 (Domestic Stocks)
Dow Jones Global ex-U.S.
10-year Treasury Note (Yield Only)
Gold (per ounce)
Bloomberg Commodity Index
DJ Equity All REIT Total Return Index
International Markets: Canada’s TSX followed last week’s gain with another one of 1.0%, while across the Atlantic the United Kingdom’s FTSE rose 0.2%. On Europe’s mainland, both Germany’s DAX and France’s CAC 40 added 0.1%. Italy’s Milan FTSE retreated -0.7%. In Asia, China’s Shanghai Composite retraced almost all of last week’s gain falling -2.9%. Japan’s Nikkei ended up just 0.03%. As grouped by Morgan Stanley Capital International, developed markets rose 0.1%, while emerging markets stumbled -2.5%.
U.S. Economic News: The number of Americans collecting new unemployment benefits fell to the lowest level since 1973 last week, reinforcing the downward trend in layoffs that is expected to continue. The Labor Department reported initial jobless claims fell by 1,000 to 214,000 last week. In addition, the more stable monthly average of claims also declined by 250 to 213,750. Continuing claims, which counts the number of Americans already receiving unemployment benefits, fell by 8,000 to 1.62 million—also marking its lowest level since 1973. Initial claims have been below 220,000 for four and a half months, a remarkably long stretch of extremely low layoffs.
The number of job openings in the United States retraced in September, a month after setting an all-time high. The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) reported job openings slipped to 7 million on the last day of September, down from a record 7.3 million in August. However, companies are still scrambling to find workers and offering higher pay and benefits to attract them. Even after the decline, the number of job openings still exceeds the number of Americans officially classified as unemployed by a huge 900,000. The number of job openings first surpassed the number of unemployed in the early spring. The “quits rate”, widely believed to be the Federal Reserve’s favored measure of the jobs market as it is assumed that a worker would only leave a current job for an even better one, remained unchanged at 2.7% among private-sector employees. That number is at its highest level of the current expansion and close to the record high of 2.9% set in 2001.
The U.S. economy is still running strong according to the latest survey from the Institute for Supply Management (ISM). ISM’s services survey showed its index fell just slightly last month, remaining near its 21-year high. ISM’s non-manufacturing index slipped 1.3 point to 60.3 in October with numbers over 50 generally viewed as positive for the economy, and readings over 55 considered exceptional. In the details, almost every major service industry expanded in October. Education was the only component to show a decline. The biggest complaints among survey respondents continue to be uncertainty caused by U.S. tariffs, difficulty securing transportation, and other constraints on production. The index is compiled from a survey of executives who oversee ordering raw materials and other supplies for their companies.
Americans remain upbeat about the economy despite the recent stock market volatility and rising interest rates, a survey of consumers showed. The University of Michigan reported its consumer sentiment index fell just 0.3 point to 98.3 in November, in line with economists’ forecasts. The index has averaged 98.4 over the past year—the highest level since 2000. In the details, younger people are optimistic that wages and incomes will continue to rise, while older Americans worry about erosion in their standard of living due to higher interest rates. Notably, the 2018 elections didn’t appear to have a significant impact on consumers’ attitudes.
The Federal Reserve held its key interest rates steady this week, signaling that they will stay the course and move rates up at a gradual pace in the coming months. In a move that was widely expected, the Fed kept its benchmark target for rates unchanged at 2-2.25% and left its policy statement unchanged. The statement said, “With jobs gains “strong” and economic activity “rising at a strong rate”, the “Committee expects further gradual increases in the target range for the federal funds rate.” Furthermore, the Fed noted that inflation remained near its 2% target. The only change was that the Fed noted that business investment had moderated in the third quarter. Analysts currently see a roughly 80% chance of a quarter-point rate hike at the Fed’s next meeting in December.
International Economic News: Bank of Canada governor Stephen Poloz stated in a speech in London this week that the global economy was strong enough for stimulus to be “steadily withdrawn”. The remarks came as the Bank of Canada signaled it would gradually raise its benchmark interest rate from its current level of 1.75% to “somewhere between 2.5% and 3.5%”. Poloz recently hiked interest rates for the fifth time in 15 months and warned Canadians to get used to 3% interest rates as the “new normal”. Surprisingly, governor Poloz stated that the recent market volatility in October was actually a good thing. Mr. Poloz said the longstanding trend toward lower bond yields appears to be over as interest rates rise and risks are shifted back to markets. The change is producing a recalibration in equity markets and leading to a more normal level of volatility, he said. “These characteristics do not point to a gloomy economic outlook by any means,” Mr. Poloz said. “Rather, they are welcome symptoms of normalization.”
The United Kingdom’s Office for National Statistics (ONS) reported the UK economy expanded at its fastest pace since late 2016. The ONS reported the UK economy grew by 0.6% in the third quarter, in line with predictions from the Bank of England and other forecasts. It was the highest quarterly growth figure since the fourth quarter of 2016, when the economy grew 0.7%. However, in the details of the report, robust growth in July was offset by a slowdown in August and September. Analysts warned the economy had “little underlying momentum” and growth would decline in the fourth quarter.
French unions began another contentious round of negotiations this week as President Emmanuel Macron’s government looked to step up reforms of the country’s unemployment system. The French President intends to bring unemployment down by reducing the number of short-term contracts and making long-term work more attractive to job seekers. Mr. Macron also wants to make it less attractive for people to go in and out of employment while claiming benefits. Philippe Martin, who heads the French Council of Economic Advisers said, “The general issue in France is that even if we created quite a lot of jobs, [full-time] unemployment is still not decreasing.”
Germany’s Council of Economic Experts stated it expects 1.6% growth for Germany this year, but only 1.5% next year—a drastic reduction from the 2.2% they had forecast a year ago. Geopolitical issues remained as the top concern of the council. In their report, they noted that the German economy is in one of its longest upswings since World War II but wrote that "a less favorable foreign trade environment, temporary production issues and capacity bottlenecks are slowing the pace of expansion." Jorg Kramer, chief economist at Commerzbank agreed with the findings in a note stating, “The downgrade is reasonable. There are big downside risks to the German economy, and all the latest business surveys and confidence indicators have been worse than expected.”
China’s central bank, The People’s Bank of China, stated the Chinese economy was facing downward pressure in the its most recent update of its monetary policy implementation report. China’s gross domestic product slowed to 6.5% in the third quarter, its weakest quarterly reading since the global financial crisis. The report came as Li Yang, head of the National Institution for Finance and Development, forecasted that China’s economic expansion may be entering a long-term “downward spiral” as all three engines of growth—investment, exports, and consumption—slow. Li said in a speech, “We need to pay extremely close attention because it might mean that the economy is in a kind of downward spiral. “
A Reuter’s survey of economists showed Japan’s economy is expected to contract in the third quarter following natural disasters that disrupted production and a slowdown in overseas demand that undermined exports. Analysts expect Japan’s economy will recover from the setbacks caused by the strong typhoons that hit western Japan and the earthquake that hit Hokkaido, but still see risks to growth from declining momentum in the global economy. Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute commented that economic data for the third quarter “will likely show the economy was at a standstill.” Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities noted, “the global economy has already hit its peak and there is a growing risk that downward pressure from the Sino-U.S. trade war could intensify in 2019.”
Finally: It is well-known that the United States economy is the largest in the world, but by how much? Mark Perry at the American Enterprise Institute created a very interesting infographic that shows each of the individual states in the U.S., labeled with the name of a country of comparable GDP. For example, the GDP of Colorado is equivalent to the GDP of Ireland, Texas is equivalent to Canada, etc.
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*S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
*Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.