ND&S Weekly Commentary (11.26.18) – Markets Serve Up Cold Turkey

November 26, 2018

Markets were under pressure last week over global growth concerns. The U.S. trade relations with China and potential for increased tariffs beginning next year are weighing heavily on investors’ minds. In addition, the Federal Reserve is expected to raise rates at their December meeting while multiple rate increases are expected for next year. Any improvement on trade relations and/or some dovish fed comments will improve investors’ outlook.

For the holiday-shortened week, the DJIA declined 4.4% while the broader-based S&P 500 retreated 3.8%. International equities fared a bit better on the week, but were also negative. Developed International represented by the MSCI EAFE declined 1.1% and emerging markets were off 1.7%. Recently, bonds have offered a place for investors to hide but are still negative on the year. The 10yr US Treasury yield started the year at 2.40% and closed last week at 3.05%. We continue to favor shorter duration fixed income as the yield spreads are tight (i.e. 2yr treasury yield is 2.81% … a 24bps spread to the 10yr) while uncertainties over rates continue.

Economic data during the week was a bit light; housing starts increased 1.5% m/m slightly missing expectations … durable goods orders declined 4.4% in October missing expectations. The positive spin is these lower than expected results may give the Fed some pause and temper its guidance. In the week ahead, there will be reports on consumer confidence, new home sales, inflation and the 2nd release of 3Q18 GDP.

At ND&S, we view the recent “correction” (measured by a decline of at least 10%) in equities as a normal market reaction … unpleasant as it may seem. Markets also corrected in February of this year and normally experience one about every year. Stocks in cyclical sectors consisting of technology, consumer discretionary and energy have triggered the most recent declines. However, stocks that are classified as “defensive” have held up much better and in some cases appreciated. The economy appears strong and we are encouraged by strengthening consumer spending as evidenced by Black Friday online sales increasing 23.6%, according to Adobe Analytics, and confidence readings remaining near peak levels. Unemployment continues to hover around 3.7%, lowest since the late 1960s. In addition, wage growth is up 3.1% from a year ago. In times like this, we are reminded of a quote from Byron Wein: “Disasters have a way of not happening”