HIGHLIGHTS:
The S&P 500 fell for second consecutive week.
Stocks are the cheapest in over 2½ years.
Economic data was mediocre, but Black Friday spending appeared strong.
Brexit moved forward, a positive, but tensions with China increased.
The Week Ahead: All eyes will be on the meeting between Presidents Trump and Xi.
The S&P 500 fell for second consecutive week.
The S&P 500 fell over 3½% in a holiday-shortened trading week, as investors fretted over escalating trade tensions with China, a more cautious 2019 economic outlook and falling energy prices. The significant decline was, in part, a mathematical phenomenon attributed to drops in a few specific large-cap companies, as evidenced by the more modest decline in the average stock of less than 2½%. Via Nova believes the large moves in individual stocks are a result of more company-specific issues and less indicative of general economic and financial conditions. Small cap, international and emerging market indexes outperformed the S&P 500.
In other markets, Treasury yields edged a bit lower, but the improvement in Treasuries was mostly offset by wider credit spreads leaving the Bloomberg/Barclays Aggregate Bond Index nearly unchanged for the week. Oil prices fell further and are now down by nearly a third from the recent peak, as concerns of excess supply weighed on prices. Real estate and Treasury Inflation-Protected Securities (TIPS) also declined, while gold prices held steady. The trade-weighted value of the dollar rose amid the global uncertainty and is up nearly 5½% so far in 2018. A stronger dollar generally lowers the cost of imports for consumers but makes exports more expensive and less competitive.
Stocks are the cheapest in over 2½ years.
The drop in the S&P 500 from its recent peak amid strong growth in corporate profits has made stocks the cheapest they have been in over 2½ years. The Forward Price/Earnings (P/E) Ratio, a key valuation metric that compares stock market prices to expected corporate profits, fell to the lowest level since early 2016. The decline in the Forward P/E suggests the market has already begun to discount potential challenges in the coming year. Positive news, in the form of lower trade tensions or a slower pace of Federal Reserve rate increases would likely ease market concerns and help lift stock prices.
Economic data was mediocre, but Black Friday spending appeared strong.
Via Nova believes the fundamental picture for the U.S. economy remains strong, with no recession on the horizon. U.S. economic data was mediocre in the latest week, but housing data improved slightly, and the Leading Economic Indicators Index continued to rise. New orders for capital goods, an indicator of future capital spending, disappointed, but overall, investment growth is trending higher. Uncertainty related to the impact of current and future trade policy makes business decision-making more difficult, and the uncertainty could delay important projects.
Reports on Black Friday holiday spending were very encouraging suggesting that the combination of strong job growth, increased earnings and higher confidence have come together to fuel increased holiday spending. Anecdotes on mall traffic and data on online spending point to a good start to the biggest shopping season of the year, which could support healthy fourth quarter economic and earnings growth.
Brexit moved forward, a positive, but tensions with China increased.
More than two years after Britons voted to break from the European Union, the leaders of the remaining EU members approved a treaty setting out the terms of the U.K.’s exit (Brexit). If Britain’s PM, Theresa May, can win Parliament’s approval, then the U.K. can start negotiations on new trade and security relations after its March exit. An orderly Brexit would be a positive development for international markets.
On the negative side, trade tensions with China escalated in the latest week after Vice President Pence blasted China trade practices at an Asian trade summit. Highlighting the discord, for the first time in a quarter century, the group could not agree on a post-meeting statement. This tension will put more pressure on the upcoming discussions between Presidents Trump and Xi at the upcoming G-20 meeting.
The Week Ahead: All eyes will be on the meeting between Presidents Trump and Xi.
While there will be some important updates on consumer income and home prices, all eyes will be on President Trump and Chinese President Xi Jinping when they meet at the G-20 Summit at the end of the week. The two leaders will seek a path forward to resolve a trade dispute that has led to each side imposing significant tariffs on the other’s imports. Via Nova believes even a cordial meeting between the two with plans to continue talks could be a positive for the markets.
Also, in the coming week, the Federal Reserve will release the minutes of the November 7-8 Federal Open Market (FOMC) meeting, in which they kept interest rates steady but had no post-meeting press conference. Analysts will dissect the minutes to gain clues as to whether the members of the FOMC might taper the pace of rate increases in 2019. A friendlier Fed would also be a market positive. Via Nova believes the Fed has already raised interest rates enough to slow key interest rate sensitive sectors of the economy, such as housing, and that interest rates will likely rise more slowly in 2019.