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Markets struggle to gain footing entering holiday season

NOV. 26, 2018
  • U.S. markets continued their move lower, with high-beta technology and energy names leading the way. The S&P 500 Index lost nearly 4%, and is testing the lows from late October. The NASDAQ broke through the October lows, as technology shares are leading the decline. For the year, the S&P has a negative total return. The Russell 1000 Growth and NASDAQ are the only major indexes with positive returns.
  • There are increasing signs that the sugar rush of economic growth seen over the past two quarters is moderating, with core durable goods roughly flat in October, following a surprising miss in September. Consumer sentiment, while still high by historic standards, declined more than expected. Purchasing Managers’ Index (PMI) service and manufacturing data on Friday were below expectations, though do continue to show growth in the economy. One encouraging area was housing, with existing home sales better than expected, breaking a six-month negative streak.
  • Early signs are strong for retail sales to date, with a clear trend towards online shopping. Adobe Analytics noted a 24% jump in online Black Friday sales to $6.2 billion, with online sales on Thanksgiving up 28% to $3.7b. It will be interesting to see if this is incremental demand or stealing sales from Cyber Monday, which is expected to grow 18% to $7.8b. Mall-based traffic fell, though estimates are reasonably wide at -1% to -9%. Lower income shoppers saw a boost, driven by improving wage growth and declining gas prices.

  • China: The long-awaited G20 meeting between Presidents Trump and Xi happens Friday and Saturday. China’s latest reading of PMI comes Friday, which may show a continuing of the slowdown. Markets were lower last week on reports that the U.S. is convincing allies not to buy technology equipment from Huawei, citing security concerns, perhaps stoking tensions.
  • Brexit: European leaders approved the Brexit deal between the E.U. and U.K., with both sides reiterating the intention to keep a close relationship, but also noting that this will be their best deal. There are increasing signs that the deal won’t pass the House of Commons, so there are reports that the sides are working on a plan B.
  • Italy: Markets began the week on a strong note in Europe, led by signals that Italy is willing to compromise on the budget impasse, perhaps bringing the deficit target to 2.0-2.1% from the current 2.4% proposal. This, along with fresh talk of the European Central Bank (ECB) adding stimulus to avoid tightening of lending conditions drove the move higher.
  • Most domestic indexes fell between 3-4% in light trading last week. Global stocks continued their recent trend towards outperformance, with developed and emerging indexes down by roughly 2%. Value stocks outperformed growth, and small caps beat large. Health care, communication services and industrials led, while energy, financials and technology lagged.
  • Commodity prices continued their sharp decline, with the Goldman Sachs Commodity Index 7% lower, driven by a 10% decline in crude. Since early October, crude has lost nearly 35%, and is at the lowest level since last October. While there are some parallels between now and early 2016, crude prices at that time broke below $30, and we are currently above $50. Bond yields were modestly lower for the week, with the 10-year yield at the lowest level in two months, and the spread between the 10-year and 2-year back to 0.22%. Spreads continued to show signs of stress, with high yield spreads at the highest level in nearly two years.

What to Watch

  • Active week for Fed watching and economic data, led by a speech by Fed Chair Powell on Wednesday, followed by the minutes from the recent FOMC meeting on Thursday. We will see consumer confidence on Tuesday, revised GDP on Wednesday and personal spending and income on Thursday.

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