Investment Commentary –October 9th, 2018

Year to Date Market Indices as of Market Close October 9th, 2018
Dow 26,475 (7.15%)
S&P 2,888 (8.04%)
NASDAQ 7,775 (12.72%)
Gold $1,191 (-9.18%)
OIL $75.09 (28.53%)
Barclay Bond Aggregate (-1.69%)
Fed Funds Rate 2.25% (last increase was 9/26/18)

Stocks struggle to break three-day decline, but bond yields remain in focus

U.S. stocks were mixed in choppy trading, as investors continued to monitor bond yields and the implication that rising yields could have on equities.

Where are the major benchmarks trading?

The Dow Jones Industrial Average DJIA, -0.04% fell 59 points, or 0.2%, to 26,428. The S&P 500 SPX, +0.16% rose 1.67 points, or less than 0.1%, to 2,886.10. The Nasdaq Composite Index COMP, +0.60% rose 0.4% to 7,768.94. All three initially traded in negative territory, and both the S&P and the Nasdaq are coming off three straight days of declines.

For a third straight session, the S&P 500 dipped below its 50-day moving average, a closely watched gauge of short-term momentum. However, it subsequently rebounded above it, suggesting it could be serving as a support level. The benchmark index hasn’t closed below its average since July.

What’s driving market action?

Recent trading has been driven by rising bond yields and interest rates, both of which could signal a new phase in postcrisis markets that have enjoyed a protracted period of ultralow yields. Higher yields equate to steeper borrowing costs for corporations and investors alike, and have caused a reassessment of equity valuations, already deemed lofty by some measures. On top of that, richer rates of so-called risk-free bonds can compete against equities, which are perceived as comparatively riskier.

Climbing rates, however, have come against a solid backdrop for the domestic economy, with a number of economic indicators supporting the notion that the U.S. expansion continues apace.

Technology shares rebounded from a three-day rout to lead stocks mostly higher, while Treasury yields retreated from a seven-year high amid rising trade tensions and a sketchy outlook for global growth. The dollar rose and crude headed toward $75 a barrel.

The Nasdaq indexes surged after losing nearly 4 percent over the previous three sessions with EBay Inc. climbing the most since February. The S&P 500 Index rose but the Dow Jones Industrial Average was essentially flat amid a decline in materials shares after a leading coatings maker warned that profits would fall short of analyst forecasts.

“Tech’s slide — outside semiconductors — has stopped due to the pause in interest rates moving higher,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “Separately from that, people are stepping in and buying some of these names because they’re on sale.”

Around the web

Tech trouble: Stocks started out the week with strong gains but dropped sharply on Thursday and Friday, with information technology stocks weighing on the broader market. The NASDAQ and a small-cap benchmark, the Russell 2000 Index, trailed the S&P 500 and the Dow by wide margins.

Yield pressure: Concerns about inflation and the pace of interest-rate increases weighed on bond prices, as the yield of the 10-year U.S. Treasury bond surged above 3.20%—the highest level in more than 7 years. As recently as September 6, the yield was below 2.90%.

Dividend boom: Dividend payments by companies in the S&P 500 Index are on track to break a record for the seventh year in a row, according to S&P Dow Jones Indices. So far this year, companies in the index have announced 291 dividend increases, with only 2 dividend reductions.

NAFTA 2.0: The United States and Canada negotiated a new trade deal to replace the North American Free Trade Agreement. The pact follows an earlier agreement that the Trump administration reached with Mexico and is subject to final approval from Congress as well officials in Canada and Mexico.

Other Notable Indices (YTD)
Russell 2000 (small caps) 7.12
EAFE International -4.58
Emerging Markets -8.84
Shiller Annuity Index 12.46

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.