Investment Commentary – October 16, 2018

Year to Date Market Indices as of Market Close October 16, 2018
Dow 25,715 (4.05%)
S&P 2,802 (4.87%)
NASDAQ 7,618 (10.39%)
Gold $1,228 (-7.54%)
OIL $71.93 (23.14%)
Barclay Bond Aggregate (-2.22%)
Fed Funds Rate 2.25% (last increase was 9/26/18)

U.S. Stocks Rally Most Since April as Tech Surges: Markets Wrap

U.S. stocks gained the most in six months as corporate earnings reports provided a respite from tensions over trade and geopolitics. The dollar declined.

The S&P 500 surged back above 2,800 as it continues a rebound from last week’s sell-off, while small caps in the Russell 2000 Index jumped the most in almost two years. The Nasdaq Composite headed for its biggest gain since March as UnitedHealth Group’s earnings bolstered health-care firms. Adobe Inc.’s forecast lifted software makers as technology stocks advanced before Netflix reports after markets close.

“The third quarter, which is now underway, would be the first sign if you’re looking for a smoking gun for either tariffs or tightening conditions,” Jurrien Timmer, director of global macro at Fidelity Investments, said by phone. “People at this point want to be relieved or are feeling that things aren’t as bad as last week suggested.”

Better results at the start of earnings season are giving many investors breathing room from concerns that a slowdown could be on the horizon. Netflix Inc. becomes the first large technology company to report after today’s close, while minutes from the latest Fed meeting should offer more clues a day later. In the background, traders are still grappling with continuing U.S.-China trade war rhetoric and geopolitical strains.

The week ahead: By JP Morgan’s DR. David Kelly : The Case of the Rising Rates

The great detective stands in front of the drawing-room fire, twirling the ends of his moustache as he ponders the Case of the Rising Rates. He knows who committed the crime – but what to do about it? He surveys the four suspects arrayed on the sofas before him, Inflation, Growth, The Deficit and The Fed. He clears his throat.

“Facts. I am a dealer in facts, not opinions, and we have two before us. The first fact is that interest rates have risen. Since the start of the year, the yield on a 10-year Treasury bond has climbed by 83 basis points. The second fact is that interest rates didn’t just jump – they were pushed. So who did it? Let’s start with Inflation”.

“Why does everyone always blame me?” says Inflation.

“Because it’s usually your fault.” says the Fed.

“Look it’s not me this time.” replies Inflation. “You saw wages last week – up just 2.8% year- over-year in September. They were up 2.7% year-over-year in December. That can’t be enough to have pushed yields up by more than 0.8%. And I have some readings coming out this week – CPI should be up just 2.4% year-over-year – and even that is because of higher energy prices which you know won’t last.”

“And one other thing. Answer me this: Since the start of the year, the yield on a 10-year TIP has risen by 63 basis points. I don’t have any effect on TIPs because you get paid whatever the real yield is plus inflation. So more than three-quarters of the surge in rates couldn’t be my fault.”

“Simmer down, Inflation”, says the detective.

“I HAVE simmered down – that’s the point. I admit to being pretty volatile back in the ‘70s but I haven’t caused any problems in 30 years. You know, at my core, that I am stable. If you ask me, you should look at Growth”

The detective shifts his gaze. “Well, what about it Growth? You surged to 4.2% annualized in the second quarter – aren’t you to blame for rising rates?”

Growth looks unconcerned and replies in a steady voice:
“You need to understand that this surge is temporary. Yes, real GDP rose by 4.2% annualized in the second quarter. But that was because of big tax cuts. I may have cooled down to less than 3% annualized in the third quarter and I’m probably going to slip to 2% or less by the second half of next year. Even if it wasn’t for the impact of rising rates and fading fiscal stimulus, I’m going to slow because we are out of workers. You saw the numbers – a 3.68% unemployment rate in September, the lowest since December 1969. These are 10-year bonds we are talking about and 10-year yields shouldn’t be knocked skywards by one year of above-trend growth. But I’ll tell you what is going to last for 10 years – Mr. Trillion dollar Deficit over there – he’s the culprit. Why doesn’t anyone ever talk about him?”

Around the web
Manic markets: The Dow dropped more than 1,300 points in two days before rebounding Friday to close down 4.2% for the week. The Nasdaq dipped into correction territory Thursday, and the S&P 500 posted its biggest nosedive since 2016. This week’s plunge, driven by rising bond yields, marks the fastest flight from equity since last winter.

Inflation inches up: Inflation rates, as measured by the Consumer Price Index, rose only 0.1% in September, an annual rate of 2.3%. Lower energy and automotive costs, coupled with a strong dollar, kept monthly and annual inflation growth rates under projections.

Other Notable Indices (YTD)
Russell 2000 (small caps) 2.11
EAFE International -7.54
Emerging Markets -11.38
Shiller Annuity Index 5.08

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.