Monday Market Review October 28, 2019
Updated: Nov 22, 2019
Economic data for the week included weaker readings for durable goods and consumer sentiment. Housing data points were down for the month but mixed on a longer-term standpoint, while jobless claims fell, which was a positive.
Global equity markets generally gained on the week, with U.S. and foreign stocks performing largely in line. Fixed income returns were flat, as interest rates were again little changed from the prior week. Commodities gained due to sharp price increases for crude oil contracts.
U.S. stocks gained on the week, with corporate earnings reports coming in a bit better than expected and improved sentiment and rhetoric concerning a China trade deal. By sector, energy, tech and industrials ended with the strongest gains. Energy was helped by oil prices recovering and helping to stem long-standing negative sentiment in that sector, while industrial earnings were lackluster by Boeing and Caterpillar, but not as bad as expected. Consumer discretionary brought up the rear, with a percent decline for the week, led by a poorer-than-expected earnings report from online retailer Amazon.
Insofar as Q3 earnings details are concerned, 40% of companies in the S&P have now reported, with 80% of them beating estimates (per FactSet). However, overall growth for the year-over-year period remains negative, at -3.7%, which is slightly better than first expected, but under water nonetheless. The overall picture would not look so dire, if it weren’t for the -40% decline in earnings for the energy sector, followed by -10% for materials. On the brighter side, the more defensive sectors of utilities, real estate and health care have been in the lead, with earnings in the positive mid-single digits.
Foreign stocks fared largely in line with U.S. stocks, helped by stronger sentiment toward an end to the U.S.-China trade stalemate. The U.K. fared surprisingly well, with support in parliament for the current withdrawal agreement, but time running out, with the upcoming Brexit deadline of Oct. 31 again likely to be extended several more months (despite possible blocks from members of the EU, particularly France, which would tighten the timeframe). The ECB decided to keep interest rates unchanged, which surprised some, in Mario Draghi’s last meeting as central bank chair. European earnings also started a bit stronger than expected, which helped sustain sentiment. Manufacturing PMIs in Europe and Japan remain in contractionary territory, but appear to be flattening or improving from trough levels, which could be helping sentiment. Due to the trade impact, emerging markets fared slightly better than developed, led by commodity producers Brazil and Russia, along with stronger energy prices. A smaller EM component, Chile, suffered sharply with escalating protests/riots following a proposed increase in bus and train fares, which morphed into deeper demands for a solution to social inequality.
U.S. bonds provided returns generally flat to slightly negative, as the only change in the yield curve was a steepening on the longer end. Risk-focused assets, such as high yield and floating rate bank loans outperformed, as expected. Foreign debt was mixed, with a stronger dollar holding back developed market sovereigns, while emerging market bonds fared positively—especially local debt.
Real estate was flat to slightly negative on net, underperforming broader equity markets, with declines in healthcare offset by stronger performance in retail/malls. European REITs underperformed other regions.
Commodities rose across the board, except for agriculture, despite the headwind of a stronger dollar. The price of crude oil rose by over 5% to a shade under $57/barrel, following reports of falling U.S. rig counts, which decreases supply, in addition to optimism over a trade deal and rumblings over possible extensions of OPEC output cuts.
Durable goods orders in September fell by -1.1%, which slightly disappointed relative to the median forecast calling for a -0.7% decline, in addition to downward revisions for the previous month. Removing transportation orders cut the decline to -0.3%, due to civilian aircraft orders being down -12%. Core capital goods orders fell -0.5%, compared to expectations of little change, and core capital goods shipments also fell by -0.7%. On a year-over-year basis, the headline durable goods orders index is down over -5%, while removing transportation orders brought the rate of change to flat.
The FHFA house price index rose 0.2% in August, which was a tenth below expectations. Home prices rose in two-thirds of the national regions, led by New England and upper Midwest states gaining over a half-percent, while the KY/TN/MS/AL region fell by nearly a percent. On a year-over-year basis, the index also continued to decelerate, by -0.5% from last month, to 4.6%, which is a low for the past several years (although a high level historically).
Existing home sales for September fell by -2.2% to a seasonally-adjusted level of 5.38 mil. units, versus expectations of a lesser decline of -0.7%. Single-family sales fell by almost -3%, while condos/co-ops rose by just short of 2%. Regionally, sales fell everywhere, with the Midwest and Northeast leading with drops of -3%, while the West only fell by -1%. Existing sales are up 4% from a year ago, with the median sales price up 6% from a year ago to $272,100.
New home sales in September fell by -0.7% to a seasonally-adjusted annualized rate of 701k units, which slightly disappointed relative to the 701k expected by consensus; this is in addition to several prior-month revisions. Regionally, sales rose in the Midwest, but declined in the other three regions, led by the West with the most significant declines. Months’ supply was stable at 5.5, as inventories declined by a few thousand units nationally. While sales activity is up 15% on a year-over-year basis, overall activity remains well-below long-term averages needed to sustain demographic growth. Interestingly, the prices for new homes have begun to roll over, with the median price falling -9% over the last 12 months to $299,400, and the average price down -6% to $362,700. Affordability could have been a factor, while lower interest rates should be helping on the mortgage financing side, although low inventories remain a challenge. In contrast to prior cycles, developers appear to be holding off on overbuilding until demand appears, which may serve to flatten supply/demand imbalances we’re used to.
The final Univ. of Michigan consumer sentiment survey for October declined by -0.5 of a point from the prior month to a level of 95.5, below the unchanged 96 reading expected by consensus and down -2.8 from the early October preliminary report. Respondent assessments of present conditions declined just slightly, but were pulled down by an over-half-percent drop for future expectations. Inflation expectations for the coming year were flat at 2.5%, while those for the next 5-10 years ticked up by 0.1% to 2.3%. The latter is near an all-time low in terms of the survey’s inflation long-term inflation expectations measure.
Initial jobless claims for the Oct. 19 ending week fell by -6k to 212k, which fell below the consensus forecast of 215k. Continuing claims for the Oct. 12 week ticked down by -1k to 1.682 mil., which still came in a bit above the 1.678 mil. claims expected. No anomalies were reported, with claims activity focused in a few manufacturing-oriented states, such as NY and MI. Overall, the low levels continue to point to a strong labor market with minimal layoffs.
Ryan Long, CFA, Director of Investments, Focus Point Solutions
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.