Capital Markets Update November 2018

Transcription

1 Capital Markets Update November 2018 from Graystone Consulting, Charleston, WV In the forty-nine business days between January 29 th of this year and April 6 th, we clogged your inboxes with twenty-three letters explaining a 1% or greater move in the S&P 500. If we didn t miss writing you a single time markets moved that much (and we did), that would mean the S&P posted a greater than 1% gain or loss on 47% of those forty-nine trading days. Well, here we go again. We understand that reminding you that these things happen, and happen often, may not make the volatility any less unnerving. It does, however, provide much needed perspective. This chart shows us that the recent number of 1% moves is far from unprecedented: For additional perspective, at the very end of this month s letter, we ve included a chart from last month. Markets, dear friends, go both up and down, but over time, it s important to remember, they rise much more than they fall. So what was behind October s rough road? We ll get into that in a moment, but first, let s look at the numbers: US equities entered correction in October but the average stock is in bear market territory. Although the S&P 500 is down 10% from its peak, the average stock is down 20%. Why? Because the bulk of returns thus far this year have been isolated to just a handful of names, particularly the mega techs such as Facebook, Apple, Amazon, Netflix and Google (aka the FAANGs). The S&P is still positive for the year, up 3%, but took a bath in October, giving up nearly 7%. That the NASDAQ lost over 9% for the month is indicative of the fact that the losses were heavily massed in the tech sector. The Dow was the winner, giving up just 5%. The news in Europe and Asia was no better. Not a single index posted gains. The ten-year US

2 Treasury bond zigzagged between falling on fears of inflation and rising in a flight to safety. It closed the month yielding 3.15%, up from 3.05% at the end of September. During the tsunami of 1% letters we posted last winter, a client commented that he felt for the people that had to ascribe a cause to every market move. He had a very good point. There does not always have to be a reason. For that matter, pundits can place the blame for both a sharp rise and a sharp fall on the very same catalyst. Is full employment a boon for bulls since it fills tax coffers and emboldens consumers or is it fodder for bears because it puts upward pressure on interest rates? Does robust consumer spending indicate continued economic growth or is that spending indicative of a debt fueled house of cards? On any given day either answer could be deemed correct. So the real reason behind October s volatility could simply be that conditions have been so favorable for so long, investors are skeptical the good fortune can last. Fundamentally, though, because this year s run up in stocks was largely fueled by the FAANGs and the sell-off was deepest in these names, one can argue that the losses were a much needed venting of steam in a sector that had gotten way ahead of itself. And then, of course, markets are muddling through a period of heightened uncertainty, both political and economic. As we ve noted many, many times before, there s nothing like uncertainty to make investors behave like long tailed cats in a world of rocking chairs. The two primary sources of fog induced angst (today, at least) are the midterm elections and trade. Midterms: Will it be a Red Wave, a Blue Wave, a mixed bag or the status quo and what might the outcome mean for investors? Polling indicates that many key races are within the margin of error so conventional wisdom as to the outcome is as clear as mud. No one outcome is inherently bullish or bearish but each could favor or pressure a given sector or asset class. While you shouldn t be surprised if there s a seismic jolt pre market on the 7 th, depending on which way (if any) Congress goes, just putting midterms in the rearview mirror has typically been a positive. Since 1950, in the twelve months following a midterm election, the S&P 500 has been up 15.3% on average, and every period has had a positive return. [i] We re not saying that markets will necessarily rise over the next year; only that getting past the rancor and mudslinging has historically been conducive to higher equity prices. Trade: The war rages on with only sporadic glimmers of progress. While the full effects have yet to be felt, both the US and China are beginning to feel the pinch and the bulk of the tariffs won t even kick in until January 1st. In China, the currency is falling and manufacturing is beginning to weaken. In the US, thus far, the brunt of the tariffs has largely fallen on manufacturers. Ford, for example, has stated that tariffs will cost the automaker in excess of $1 billion. The US consumer, by and large, has been left unscathed but if the January round of tariffs takes effect, the consumer will be drawn into the conflict. New duties are slated to include a 25% tack-on to computers, furniture, tires, luggage, gas grills, smartwatches, bicycle helmets, car seats and an endless list of other consumer products. Retailers, including behemoth Walmart are waiving the red flag. In a letter to US Trade Representative Robert Lighthizer, Walmart wrote, Either consumers will pay more, suppliers will receive less, retail margins will be lower, or consumers will buy fewer products or forego purchases altogether. As the consumer is the bedrock of the US economy, spending $13.7 trillion in 2017 alone [ii], it is understandable that investors would be deeply concerned.

3 The good news? There s a 100% chance that on Wednesday November 7 th, the midterms will behind us and the unknown will be known. As for trade, the January tariffs are still a future maybe. This can all be resolved before any real damage has been done. Furthermore, the US economy is still fundamentally solid. Of the twelve variables that have historically augured recession, only one money supply is in the caution zone [iii]. And, although only about 35% of the companies in the S&P have reported earnings yet this season, companies are posting revenue growth of 8% on average, and an average gain in profits of 21.3% [iv]. Yes, we re cautious. Yes, we expect volatility to linger. Yes, we have little doubt that we will see more ugly days before investors once again settle down and trade on the fundamentals. Nonetheless, we are confident that we re properly positioned (after all, remember that our mantra is to err defensive). As always, we ask you to be candid with yourself and candid with us about your tolerance for risk, but should you grow apprehensive nonetheless, take heart in this chart. Markets do go down, but over the long term, the axis moves steadily, intrepidly to the north. We hope you ll never hesitate to call on us with your specific questions or concerns. We always look forward to hearing from you.

4 This commentary was authored by Katherine Jones, Business Development Director, and represents the views of Donald Lucci, Kelly Castleberry, John Dawson, Mike Goodwin and Michael Hill of Graystone Consulting, Charleston, WV. CRC # /18 Graystone Consulting 500 Lee Street E Suite 300 Charleston, WV Phone: Toll-free: Fax: GraystoneCG@ms.com Visit our website at Investments and services offered through Morgan Stanley Smith Barney, LLC. Member SIPC. Graystone Consulting is a business of Morgan Stanley. [i] Source: FactSet [ii] Source: Clearbridge [iii] Source: Clearbridge [iv] Source: FactSet Important Disclosures The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. The above summary/prices/quote/statistics have been obtained from sources considered to be reliable, but we do not guarantee its accuracy or completeness. Past performance is no guarantee of future results. Market data provided by FactSet Research Systems An investment cannot be made directly in a market index S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index. NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on NASDAQ. An investment cannot be made directly in a market index. Dow Jones Industrial Average is a price-weighted index of the 30 blue-chip stocks and serves as a measure of the U.S. market covering such diverse industries as financial services, technology, retail, entertainment and consumer goods. An investment cannot be made directly in a market index. FTSE 100 Index: This index measures the 100 companies listed on the London Stock Exchange with the highest market capitalization. DAX index: This index represents 30 of the largest and most liquid German companies that trade on the Frankfurt Exchange. Euro STOXX 50 Index: Provides a blue-chip representation of supersector leaders in the Eurozone. CAC 40 Index: This index represents a capitalization-weighted measure of the 40 most significant values among the 100 highest market caps traded on Euronext Paris. NIKKEI 225 Index: This price-weighted index is comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange. MSCI Emerging Markets IMI: This index captures large, mid and small cap representation across 21 emerging market countries. The IBEX 35 is the official index of the Spanish Continuous Market. The index is comprised of the 35 most liquid stocks traded on the Continuous market. It is calculated, supervised and published by the Sociedad de Bolsas. The equities use free float shares in the index calculation. The index was created with a base level of 3000 as of December 29, KOSPI: A capitalization-weighted index of all common shares on the Korean Stock Exchanges. The Index was developed with a base value of 100 as of January 4, Note: The preferred shares are excluded in calculating the KOSPI Index from June 14, 2002.

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