Are Equities Joining a Global Trend?

The decline in U.S. stock indexes in the last week or so could mean those equities are finally joining a global trend. Most assets have negative returns for the year.

Before the decline began from record highs on Sept. 20, we had some warning signs. The major U.S. indexes were hitting new highs, but significant sectors of the market weren’t participating.

Small company stocks, as measured by the Russell 2000, began tumbling on Sept. 1. Homebuilder stocks peaked in mid-January and have returned to price levels last seen in 2016. Other stocks related to the housing market, such as Whirlpool (WHR) and Bed Bath and Beyond (BBBY), have been weak all year or longer.

Consumer staples, financials and materials never really joined this year’s rally.

Of course, a number of former market bellwethers and leaders have been having troubles for some time. These include General Electric (GE) and General Motors (GM).

Once October started, this year’s market leaders began slipping.

Technology and other growth stocks, especially as represented by the Nasdaq 100, have been leading the way down in October.

Higher interest rates and trade conflicts are the major causes of the latest declines, with higher rates probably being the stronger influence.

Assets outside the United States often are the first to show the effects when the Fed tightens interest rates. That happened this cycle.

Before the recent tumble, U.S. stocks were almost alone in positive territory. Most international stock indexes, whether in developed or emerging markets, have been in negative territory most of the year and remain there. China is a strong influence on most Asian and emerging economies, and its stock indexes are down about 20% in 2018.

Most currencies declined against the dollar with emerging economy currencies taking the biggest hits.

Commodities were up early in the year and faded as the year went on. Only recently have commodities bounced higher, led by energy, as other assets declined.

Of course, bonds have been negative almost across the board all year as the Fed increased interest rates, and most other central banks made their first moves to tighten policy.

The bottom line is that most markets were in negative territory for the year to date as of late September. U.S. stocks finally joined the rest of the world with this week’s sell-off.

October historically is one of the worst months for stocks, and this year doesn’t look to be an exception. The Nasdaq 100 had its worst start to October since 2008 and one of its worst ever.

But there’s still a case for sticking with U.S. stocks.

After the previous times when the Nasdaq 100 started October with a loss of 1% or more, it rose sharply to finish the month with a solid gain almost every time. Likewise, over the last three years whenever growth stocks underperformed value stocks for three days or longer, growth stocks usually bounced back and generated positive returns over the next four weeks.

But there are two main differences between those periods and now. One factor is that the Fed is committed to continue raising rates, perhaps higher than the market anticipates. Another factor is the escalating trade conflict with China.

Each of those factors is likely to slow economic growth and make it harder for stock prices to appreciate. That’s why our Retirement Watch portfolios have been underweight stocks and I’ve been recommending balance and diversification.

The Data

Inflation continues to push modestly higher. The Producer Price Index (PPI) rose 0.2% for the last month, compared to a 0.1% increase in August and no change in July. Prices of goods decreased 0.1% while services prices increased 0.3%. Over the past 12 months, the PPI increased 2.6%.

The Consumer Price Index (CPI) rose only 0.1%, compared to 0.2% last month. Excluding food and energy, the increase still was only 0.1%. Over 12 months, the headline CPI is up 2.3%, and excluding food and energy it is up 2.2%.

Small business optimism declined slightly to 107.9 from last month’s 45-year high of 108.8. The survey was very strong across the board again. Business owners continue to report that their biggest concern is a severe shortage of qualified workers. The owners plan to increase wages and salaries in response.

Last Friday’s Employment Situation reports generated a lot of headlines. Overall, the results were mixed, but they still reflect a strong labor market and economy.

Only 134,000 new jobs were created. That’s not a bad number historically, but it was below expectations and well below the previous day’s ADP Payrolls report. But last month’s jobs created were revised higher to 270,000 from 201,000. And manufacturing jobs surged by 18,000 for the month.

The big news for many was that the unemployment rate declined to 3.7% from 3.9%. That’s the lowest level in 49 years. But the decline in the unemployment rate largely reflects a decline in the number of people actively seeking employment. It’s down by almost 200,000 since August.

Average hourly earnings continued their steady increase. They’re up 0.3% in the last month and 2.8% over 12 months.

New unemployment claims increased by 7,000 to 214,000. This increase is attributed mostly to the effects of Hurricane Florence on North Carolina, and this week’s Hurricane Michael is likely to increase unemployment claims for the coming weeks. Even so, claims remain near historic lows.

The Markets

The S&P 500 declined 4.60% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 14.44%. The Russell 2000 tumbled 5.67%. The All-Country World Index fell 4.84%. Emerging market equities sank 5.95%.

Long-term treasuries fell 1.17% for the week. Investment-grade bonds declined 0.90%. Treasury Inflation-Protected Securities (TIPS) lost 0.38%, while high-yield bonds dropped 1.59%.

On the currency front, the dollar declined 0.12%.

Energy-based commodities lost 3.15% for the week. Broader-based commodities added 2.16%, while gold fell 0.52%.

Bob’s News & Updates

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