Performance for Week Ending 10/26/2018:
The Dow Jones Industrial Average (Dow) fell nearly 3%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) just under 4%, the Standard & Poor’s 500 Index (S&P 500) closed down 3.9% and the Nasdaq Composite Index (NASDAQ) shed 3.8%. Sector breadth was negative with all 11 of the S&P sector groups finishing the week lower. The Energy sector (-7.06%) led the retreat followed by Industrials (-5.55%) and Financials (-5.24%).
||Closing Price 10/26/2018
||Percentage Change for Week Ending 10/26/2018
||Year-to-Date Percentage Change Through 10/26/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 10/22/2018 – 10/26/2018
The major market indices finished the week broadly lower reflecting a batch of disappointing earnings reports, as well as, the lingering trade tensions with China and concerns over the impact of tighter monetary policy and higher interest rates. At one point the selling pressure pushed the S&P 500 into “correction” territory (defined by a 10% decline from a recent high) although some late-week buying activity left the broader market index down by “only” 9.3% from the September 20 all-time closing high.
“Shocktober” The month of October has a reputation for being a volatile month and this year is no exception. One of the most commonly used measurements of volatility is the CBOE Volatility Index (aka “the fear index”). The VIX started the month at a relatively muted 12 but has since skyrocketed into the mid-20’s reflecting growing fear and uncertainty in the marketplace. Meanwhile, the S&P 500, which didn’t have a 1% up or down day during the July-September period, has now produced 8 such days since October 10.
While October tends to be a rocky month, it also tends to set the stage for a very favorable seasonal period for the market. Going back to 1928, the November through April time frame has been the best 6-month window for the markets. In addition, the period following midterm elections has also been a fruitful time for the market. Guggenheim’s research team has analyzed mid-term election years and the market’s performance going back to 1946. What their work shows is that markets tend to find their footing ahead of the election and then show relatively robust performance in the 6-months that follow, with average gains during that window ranging from 12-15%.
Not Cheap, but Certainly Cheaper: If there is a silver-lining to the recent equity drawdown, it has been the contraction in the market’s valuation. The P/E multiple on the S&P 500 has fallen below 15-times the 2019 consensus EPS estimate of $179, the cheapest level in over two-years. While valuation should never be viewed as a catalyst, at a minimum, current valuation levels should help cushion any downside risk from here.
Will “Buybacks” Save the Day? Corporate buyback activity has been a key source of equity demand over the past several years. However, the current market correction is occurring at a time when most companies are in a “blackout” period. Corporations are prohibited from executing buyback programs in the weeks ahead of their quarterly earnings report. By the end of this week, over three-quarters of the S&P 500 will have released results, therefore allowing corporations to restart their buyback programs.
Bottomline: Even with the recent drawdown in the market and the surge in volatility, the outlook for the market continues to lean bullish. The earnings environment remains strong, the economy is in great shape, valuations have contracted, and sentiment has turned very bearish (a contrarian indicator). Our belief is that as long as the economy and earnings continue to grow, equity prices should ultimately follow suit.
The choppiness in the market is likely to continue in the near-term, however, assuming that macro fundamentals remain stable – which is our base-case, any additional weakness in the markets should be viewed as an opportunity to “buy the dip” ahead of what has typically been a very favorable seasonal period for the markets.
The Week Ahead: Earnings season remains in full swing with 134 members of the S&P 500 scheduled to report results. Included in this group are 6 components of the Dow Jones Industrial Average. The focal point of the data calendar will be the monthly payroll data on Friday. According to Bloomberg, nonfarm payrolls are estimated to grow by 190K while the unemployment rate is expected to hold steady at 3.7%. Other economic reports of interest include; September personal income and spending, the August Case-Shiller home price index, the Conference Board’s October consumer confidence survey. the October ADP employment report, the October ISM manufacturing index and September construction spending. The Fed speaking calendar will be relatively quiet with only Chicago Fed Charles Evans scheduled to speak on Monday.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.
Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.
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