HIGHLIGHTS:
The S&P 500 finished higher for the second consecutive week.
Market performance is mixed so far in 2018.
Observations on the midterm election results.
The Federal Reserve held rates steady at the latest meeting.
The Week Ahead: Earnings season is winding down, but the economic calendar is heating up.
The S&P 500 finished higher for the second week.
Barring a significant shift from recounts, the completion of the midterm elections combined with continued strong earnings reports and steady Federal Reserve policy helped lift the S&P 500 for a second consecutive week. The index gained over 2% led by strong performances in health care and utility stocks, though ten of the eleven sectors improved indicating a broad market advance. Small cap and international stocks showed modest gains, but emerging market equities fell, reflecting persistent concerns about rising U.S. interest rates and escalating trade tensions.
In other markets, a slight decline in bond yields helped the Bloomberg/Barclays Aggregate Bond Index inched higher. Real estate and Treasury Inflation-Protected Securities (TIPS) also improved, but both oil and gold prices fell. The price of oil is now down year to date after a rapid rise earlier in the year, reflecting excess supply, transportation bottlenecks and weaker forecasts for international growth (lower demand). The dollar rose during the week and is up over 5% year to date, which is a challenge for exporting companies, but lowers the cost of imports for consumers.
Market performance is mixed so far in 2018.
The end of the year is fast approaching (holiday decorations are already up!), and it is appropriate to take a step back and examine market performance so far this year. A great deal of attention has been paid to the volatility of the S&P 500 and to the October weakness, but greater challenges have come in other markets, where rising interest rates and escalating trade tensions have taken a larger toll. The S&P 500 is up just under 6% year to date, and the large cap index is outperforming other markets domestically and internationally. Small cap stocks are only modestly higher, while developed international and emerging market equities are down over -7% and -13%, respectively. Rising interest rates have also taken a toll on normally defensive bond portfolios, and gold prices also have been soft.
Observations on the midterm election results.
The incumbent party historically loses seats in the midterm elections, so the midterm election results were not a surprise for the markets. As expected, the Democrats gained control of the House of Representatives from the Republicans, but the Republicans added slightly to their slim majority in the Senate. Also, as expected, the stock market rallied on the results, reflecting hope that policy gridlock will dominate and allow recent tax cuts and regulation changes to remain in place.
While we all hope for a greater commitment to civility in national political discussions, Via Nova’s view is that political polarization will remain the norm, if not escalate as politicians turn their sights to the 2020 Presidential campaigns. We believe the Senate could use its stronger majority to speed up the appointment of judges, since these are not subject to House approval. While this tedious process will not likely move markets on any given day, we expect the overall trend will be toward a more business-friendly and market-friendly judiciary.
In the House, Via Nova expects the Democrats will use their new majority and committee chairmanships to elevate concerns that have been stifled over the past two years. Most of the energy will likely be focused on President Trump to derail his reelection efforts, since any sweeping legislative initiatives in the House will not likely be passed in the Senate. There may be an attempt to start impeachment proceedings, but any efforts would likely stall in the Republican-controlled Senate.
That is not to say to nothing can be done over the next two years. Most analysts believe there is potential alignment on infrastructure improvement and possibly on drug pricing reform. If so, various materials and construction companies as well as health care organizations could possibly benefit. For the most part, however, Via Nova expects rancor to rule.
The Federal Reserve held rates steady at the latest meeting.
As expected, the Federal Reserve held rates steady (2%-2.25% range) at the latest Federal Open Market Committee (FOMC) meeting on November 7-8. The FOMC did not hold a press conference following the meeting, so the markets parsed through the short post-meeting statement for clues about future policy changes. The Fed continued to see the economy and the labor markets as strong, though they did mention the slowdown in business investment in the third quarter. They also said inflation is running near its 2% target and that inflation expectations remain well-anchored. Most analysts interpreted the statement as supporting another interest rate increase at the December meeting.
However, there was no comment in the statement on the recent softness in housing statistics, which is a very interest-sensitive area of the economy. Via Nova believes the interest rate hikes over the past two years have helped push up conventional mortgage rates significantly and is likely a significant factor affecting housing momentum. While the FOMC correctly notes that overall economic growth is relatively robust, a strong argument can be made that Fed policy is already helping to slow the housing market and that a slower pace of rate hikes is more appropriate in 2019.
The Week Ahead: Earnings season is winding down, but the economic calendar is heating up.
Third quarter earnings season is winding down, and the reports have been better than expected. With 90% of companies reporting, third quarter profits grew nearly 28% from a year ago, compared with forecasts of just over 21% at the beginning of October, and over three quarters of companies beat earnings estimates.
So, with earnings season largely out of the way, the market focus will likely turn to the upcoming economic reports for clues on fourth quarter growth.Small business optimism has been very high, and the October update is expected to show more relative strength.Forecasts for holiday spending call for near 5% growth from 2017, which suggests continued economic strength in the fourth quarter.The Consumer Price Index (CPI) is thought to have risen a bit faster last month, while retail sales and industrial production growth is forecast to show additional gains in the upcoming updates.