Performance for Week Ending 9/7/18:
The Dow Jones Industrial Average (Dow) dipped 0.19%, the Wilshire 5000 Total Market IndexsSM (Wilshire 5000SM) fell 1.21%, the Standard & Poor’s 500 Index (S&P 500) closed off 1.03% and the Nasdaq Composite Index (NASDAQ) shed 2.55%. Sector breadth was negative with 7 of the 11 S&P sector groups finishing the week lower. The Technology sector (-2.93%) was the worst performer while the Utilities Staples sector (+0.99%) was the best.
||Closing Price 9/7/2018
||Percentage Change for Week Ending 9/7/2018
||Year-to-Date Percentage Change Through 9/7/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 9/3/2018 – 9/7/2018
The major market indices finished the holiday shortened week mostly lower as a drubbing in the high-flying Technology sector weighed on the broader market. Note that the tech sector carries the largest weighting in the S&P 500 at over 26%. Adding to the market’s woes, was the likely implementation of tariffs on another $200 billion of Chinese imports and indications from President Trump that duties on an additional $267 billion in Chinese goods may be on the table. Little resolve in the NAFTA negotiations and a further melt-down in the Emerging Markets also kept investors close to the sidelines.
Economic data remained solid with the Labor Department reporting that August nonfarm payrolls expanded by 201K, up from a downwardly revised 147K last month and ahead of the 190K expected by economists. The unemployment rate was unchanged at 3.9% while average hourly earnings rose by a better than expected 0.4% and are now up 2.9% on a year-over-year basis. The year/year pace in wages is the highest since mid-2009. Meanwhile, the Institute for Supply Management (ISM) reported that its ISM Manufacturing Index jumped 3.2 points in August to 61.3, the highest level since May 2014 and solidly ahead of the 57.6 expected by economists. The “guts” of the report were strong with the forward looking new orders component jumping to 65.1, the highest level in 7 months.
Focus on the Fundamentals: The S&P 500 has now delivered two consecutive quarters of 20%-plus earnings growth, the economy grew by 4.1% during the second quarter and according to the Atlanta Fed’s GDP Now model, Q3 GDP is tracking at a 4.35% pace. The markets valuation has contacted since the start of the year, leaving the S&P at a less demanding P/E multiple of 16-times the 2019 consensus earnings forecast. The headline noise surrounding tariffs and political dysfunction in Washington is not likely to go away anytime soon, however as long as the economy and earnings continue to grow, the market is likely to follow suit.
While we are entering a seasonally weak period for the market and the risk of a market pullback has grown, assuming that macro fundamentals remain stable, any sharp drawdowns would be viewed as a tactical opportunity to add equity exposure to portfolios.
With that said, over the intermediate term we do see a growing probability that the US economy could fall into recession during the first half of 2020. Historically, investors tend to discount the arrival of recession by about eight months, on average, suggesting that the market could begin to face some headwinds later next year.
The Week Ahead: It will be a relatively uneventful week with limited data releases and just five members of the S&P 500 index scheduled to report earnings. Reports of interest on the economic calendar include; the July JOLTS report, the August producer price index, the August consumer price index, August retail sales, August industrial production and the University of Michigan’s consumer sentiment survey for September. Also of note will be the release of the Federal Reserve’s periodic Beige Book report on Wednesday. The Fed speaking calendar will be active with seven different appearances scheduled throughout the week.
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.
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