Last week did nothing to dispel October’s reputation as a tough month for the markets. The S&P 500 lost 3.94%, the Dow declined 2.97%, and the NASDAQ dropped 3.78% during what was one of 2018’s most volatile weeks so far. All three indexes are down significantly for the month, and both the S&P 500 and Dow have entered negative territory for 2018. International stocks in the MSCI EAFE also struggled, posting a 3.87% drop for the week, and a 13.31% decline for the year.
Why did stocks drop? Will they continue to do so?
Currently, many topics are on investors’ minds, from inflation to tariffs to valuations and beyond, but analysts are not pointing to one single culprit for last week’s performance. Instead, a mixture of concerns, with a large dose of emotion, seemed to drive the markets.
Emotional reactions are understandable when volatility emerges, but they have no place in long-term investment strategies. Instead, we need to focus on the fundamentals.
What did we learn last week?
Trying to find simple explanations for market behavior can feel impossible, in part because the markets aren’t a machine – they’re a reflection of many human actions. Investors make choices based on their interpretations of current conditions, and the effects of these decisions become “market performance.”
Amidst the volatility, we received several updates on the economy, including:
- 3rd Quarter Gross Domestic Product (GDP) beat expectations: The initial GDP reading for the 3rd quarter came in at a strong 3.5%, helped in large part by consumer spending.
- Corporate earnings have been strong, but imperfect: So far, this corporate earnings season is showing 22% growth, but fewer S&P 500 companies are exceeding analysts’ predictions than in the 1st quarter of 2018. In particular, some major tech companies’ results disappointed investors.
- Housing continued to struggle: New home sales were lower than expected in September, which followed disappointing results from existing-home sales data, as well.
- Inflation growth eased: The Personal Consumption Expenditures Price Index, which shows inflation, increased by 1.6% in the 3rd quarter, much lower than projected.
Examined together, this data indicates that while the economy has potential challenges, it also demonstrates solid growth, reasonable inflation, and strong corporate performance. That story feels different than the sharp drop we experienced last week. However, when you look at the bigger picture, our current circumstances provide another reminder that volatility is normal, and examining economic fundamentals is critical.
Still, risks exist, and in the coming weeks we will pay very close attention to data and performance. In particular, we will follow the Federal Reserve’s comments and actions to see what may lie ahead for interest rates. In the meantime, please let us help answer your questions and address your concerns. We are here to help you pursue your goals, in every market environment.
Monday: Personal Income and Outlays
Tuesday: Consumer Confidence
Wednesday: ADP Employment Report
Thursday: PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending, Jobless Claims
Friday: Employment Situation, Factory Orders
In this month’s video, I will discuss some of the major headlines that influenced markets in February. I will also provide insight into what these developments could mean for you as an investor.
If you have any questions or concerns about your portfolio after watching this video, or would like a second opinion, please don’t hesitate to reach out to us. You can send us an email, or give us a call at (419) 425-2400. We would be happy to talk with you.
January 2018 is behind us, and stocks posted quite a positive start to the year. In fact, even anticipation of the first federal government shut down since 2013 didn’t derail markets.
Several details that came out during the month indicated that a strengthening economy is driving market performance. In this video, I will discuss the major economic events that took place last month, and how they could have an impact on you as an investor.
As always, if you have any questions or concerns after viewing this video, please don’t hesitate to give us a call at (419) 425-2400, or send us an email. We would be happy to talk with you.
Last week, the NASDAQ posted an eighth straight week of gains for the first time since 2010. Though late last week we saw minor losses in the other major indices, the market has held on strong since its post-Brexit boom. For the week, the S&P 500 lost 0.01%, the Dow fell 0.13%, the NASDAQ gained 0.10%, and the MSCI EAFE lost 0.64%.
With the market’s stellar performance as of late, we can’t help but ask, what is the Fed thinking? Minutes from the July Federal Reserve Open Market Committee meeting showed that officials are split about the economic outlook and when to raise interest rates. Hawkish rhetoric from Fed members who favor a rate hike soon could push the central bank into raising rates as early as September. More dovish officials aren’t convinced that tepid inflation will rise to the Fed’s 2.0% objective and favor a wait-and-see approach to raising interest rates.
After several months of strong labor market gains, some economists think the economy is close to full employment and central bankers should move soon to put on the brakes by raising interest rates. If the economy gets overheated, prices could rise too much and push the economy into a boom/bust cycle that federal officials are anxious to avoid.
While a few years of outsized growth sounds nice after the years of slow expansion we’ve experienced, the economic consequences that might follow wouldn’t be pleasant at all. That’s why central banks like the Fed act to smooth out these economic cycles by lowering interest rates when times are tough (boosting investment through cheap credit) and raising them when growth picks up again (curbing excessive optimism by making credit more expensive).
The timing of rate increases is tricky, and the macroeconomic relationships that govern these decisions are complex and open to interpretation. This explains why some of the best economists in the world can’t agree on when to pull the trigger.
Which group will win out? Since the Fed has been reluctant to jump the gun on interest rates, we don’t see a rate hike coming next month. However, the Fed might decide to surprise us.
Currently, Wall Street traders judge the odds of a September hike at just 18.0%. However, traders think the Fed is likely to raise interest rates in 2016, judging by December’s rate probabilities. Will the Fed move soon? We’ll keep you informed.
This week is packed with economic data that will show us how the housing and manufacturing sectors are doing. We’ll also get a second look at second-quarter economic growth in Friday’s Gross Domestic Product report. Stay tuned for next week’s update.
Tuesday: New Home Sales
Wednesday: PMI Manufacturing Index Flash, Existing Home Sales, EIA Petroleum Status Report
Thursday: Durable Goods Orders, Jobless Claims
Friday: GDP, International Trade in Goods, Corporate Profits, PMI Services Flash, Consumer Sentiment
Inflation remains flat. Consumer prices remained unchanged in July as gasoline prices fell for the first time in months. Modest inflation may reduce the chances of future interest rate increases by the Fed.
Housing starts surge to five-month high. Groundbreaking on new residential projects rose in July, potentially boosting second-quarter economic growth numbers.
Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits dropped last week, suggesting the labor market continues to strengthen and approach full employment.
Industrial production rises more than expected. A measure of industrial sector production (including hard industries like mining, manufacturing, and utilities) increased by 0.7% versus the 0.3% rise expected.