Monthly Archives: October 2018

Market Commentary: October 30, 2018

Paradigm Financial Advisors

Market Commentary

October 30, 2018

 

Stock Market Volatility:  Market volatility continued today with the Dow Jones Industrial Average closing up 431 points (1.77%) and the S&P 500 ended the trading session up 41.38 points (1.57%).  Last week U.S. equities declined 3.9% and global stock markets also struggled as European stocks fell 4% and Emerging Market stocks were down 3.3%.  Yesterday, stocks initially opened higher but the gains were lost after Bloomberg reported that the U.S. is planning more tariffs on Chinese imports if the meeting at next month’s G20 meeting between President Trump and Chinese President Xi fails. The October sell-off has erased all of the year to date gains in the S&P 500 despite strong economic reports and corporate earnings growth for Q3 coming in at 22%.

As we discussed in our market update last week, investors are concerned about a number of potential risks that could undermine the U.S economy such as the Federal Reserve raising rates too quickly, lower earnings growth in the future, negative consequences of the trade dispute with China, uncertainty in Europe surrounding  BREXIT & the EU’s rejection of Italy’s budget, and potential sanctions against Saudi Arabia after the murder of Jamal Khashoggi.

 

Over the weekend we dug deeper into the market data and it became clear that there are a number of trading related factors that also contributed to the magnitude of the sell-off:

1)  Stop-Loss Orders:  A large volume of trades were triggered by investors having entered Stop-Loss orders on stocks in order to protect their gains.  Stop prices are not guaranteed execution prices. A “stop order” becomes a “market order” when the “stop price” is reached – unless

the investor places a limit on the stop order.  Stop orders can add to selling pressure during volatile market conditions and many investors who enter stop orders end up selling at a price significantly below their expectations.

2) Profit-Taking:  Some active mutual fund managers do not want to risk trailing the indexes so they started taking profits as soon as the market went down two days in a row.

3) VIX Volatility Trading:  Data from the Commodity Futures Trading Commission indicates that during the 30 days prior to the sell-off a large volume of trades were made shorting VIX futures. When stocks started selling off, volatility rose very quickly and institutional investors

who had shorted VIX options had to unwind their trades very quickly which exacerbated the drop in the stock market.

4)  High-Frequency Trading Algorithms: Many of the big Wall Street firms have proprietary trading departments that use “high-frequency trading algorithms” that are designed to increase volatility by adding enormous selling pressure in down markets.   Wall Street’s

proprietary trading departments will likely end up making millions of dollars in October while their clients may end up losing more money than they would have otherwise!  Note:  this is one of the reasons Wall Street firms have spent a large amount of money lobbying against the

proposed Fiduciary Standard because they would have to shut down their proprietary trading departments since it is not in the best interest of their clients.

 

These trading factors contributed to the sell-off over the past few weeks.  The good news is that these factors only impact short term prices.  Long-term stock prices are primarily determined by valuations, future earnings and economic growth forecasts.

 

U.S. Economic Growth Outlook remains Positive: The much anticipated first release of the third quarter 2018 GDP estimate was released on Friday and it showed that GDP grew at an annualized rate of 3.5%.  This was 30 basis points (0.30%) higher than consensus estimates.  This follows second quarter GDP growth of 4.2% and first quarter growth of 2.2%.  This has been the best three-quarter average GDP growth since 2014.  The tax cuts and deregulation have produced higher U.S. economic growth than what economists have been forecasting.  In the third quarter, consumer spending (which accounts for approximately 70% of our economy) rose 4%, government spending on Defense rose by 0.50% and imports rose by 9.1%.

 

Q3 2018 Corporate Earnings RecapAccording to FactSet, as of October 26, 2018, almost half (48%) of the companies in the S&P 500 have reported earnings for the third quarter.

  • 77% of Companies in the S&P 500 have beat analyst’s expectations for EPS Growth.
  • 59% of Companies in the S&P 500 have beat analyst’s estimates on revenue growth.
  • Average earnings per share growth for the S&P 500 is 22.5%.
  • Average revenue growth for the S&P 500 is 7.6%.
  • The companies in the S&P 500 Index are on pace to increase EPS by 22% with 7.2% higher revenues.
  • The bottom up target price among analysts for the S&P 500 over the next 12-months is 3,205.55. This is approximately 20% higher than today’s closing price.

October has been a very frustrating month for investors as the market seems to be reacting irrationally by ignoring strong economic reports and not rewarding companies that have posted strong earnings growth.  Typically, when a company beats earnings estimates their stock moves up immediately but that has not been the case in Q3 for most companies.

 

The Chart below shows the average one-day stock price change for the companies that have reported results thus far in Q3 (solid column) compared to the change in stock price after Q2 earnings reports (shaded column).

 

Chart Comparing Stock Price Changes after Q2 vs Q3 Earnings Reports

 

Recap of Earnings Results from Last Week:

 

Amazon reported another quarter of record profit Thursday, fueled by the growth of online shopping and its cloud-computing service, but revenue grew less than Wall Street analysts expected.  For years, Amazon has  posted razor thin quarterly profits because it has been spending most of its earnings on building warehouses and making other investments to continue growing sales.   However, Amazon’s earnings are improving dramatically due to Amazon’s Cloud Computing business.  Just one year ago, Amazon reported profit of just $256 million but then last week Amazon posted third-quarter profit of $2.88 billion, its fourth straight quarter profit above $1 billion.  Amazon’s Revenue rose 29 percent to $56.58 billion in Q3 – which was slightly below analyst’s expectations of $57.05 billion.  Amazon reported earnings per share of $5.75, beating the $3.29 per share analyst expected.  Amazon gave guidance for the fourth quarter, which includes Christmas shopping season, in the range of $66.5 billion to $72.5 billion, which is slightly lower than the $73.8 billion Analysts had been expecting.

 

Google (Alphabet) posted earnings that were 25% higher than analyst’s estimates.  Google reported a net profit of $9.19 billion in Q3 and earnings per share of $13.06 – significantly above the $10.42 EPS that analysts expected.  Alphabet Q3 revenue was $33.7 billion, up 21% year-over-year but slightly lower than Wall Street’s consensus estimates of $34.04 billion.  Google’s hardware sales were down somewhat in Q3 but they anticipate significant growth going forward with the launch the new Google Pixel 3 smartphones and other products in Q4.  Google ad revenue climbed 20%, to $28.95 billion for the third quarter, and operating income rose 10.6%, to $9.49 billion.  Google ended the quarter with $106.4 billion in cash and equivalents and marketable securities, and $3.99 billion in long-term debt.

 

Netflix’s third-quarter revenue rose 34% year-over-year, to almost $4 billion, and net income was up 130% to $481 million. Revenue growth was fueled by a 25% increase in average paid streaming memberships, along with an 8% increase in average pricing. Netflix began raising its monthly prices in November 2017, and the increase helped Netflix post an impressive increase in revenue in the third quarter.  Netflix’s profit margins rose by 6% from the prior year to 28.8%.  Quarterly EPS rose to $0.89 from $0.29 in the same period last year, which was $0.21 or 31% higher than analyst’s consensus estimates.  Netflix grew subscribers by 22% in the third quarter.  They added 1.09 million new subscribers in the U.S. and 5.87 million international net streaming members in the quarter and now has 137 million total streaming subscribers. Management currently expects 1.8 million net additional U.S. streaming subscribers in Q4 2018. The company is also forecasting a continued ramp in international streaming net adds to 7.6 million.   The market has still sold Netflix stock off over overblown fears that the costs will continue to rise as the company plans to continue to spend heavily on creating new content.

 

Intel posted third quarter earnings of $1.40 per share on an 18.7% year-over-year jump in revenue to $19.16 billion, both of which also beat analyst’s estimates.  Intel also posted higher than expected guidance for the fourth quarter of 2018. Intel said that they expect fourth quarter earnings of $1.22 per share and fourth quarter revenue to be roughly $19.00 billion. Intel now expects full year 2018 earnings of $4.53 per share, which is significantly higher than previous guidance for earnings between $3.94 per share and $4.36 per share.  Intel said it expects revenue to reach $71.20 billion for full fiscal year 2018, which is also higher than their previous forecast for sales between $68.50 billion and $70.50 billion.  Intel generated record revenue in all of their business segments and their operating margin rose by 5% to 39.7%, the strongest level in more than a decade.  Business Computing sales grew 16.0% year-over-year to $10.20 billion while operating income jumped 26.0% to $4.50 billion.  Personal/Desktop computer sales increased 9.0% and notebook/laptop computer sales rose 13.0%. The average selling price of desktop processors increased 10.0% while the average selling price of notebook CPUs grew 4.0%.  Data Center revenue jumped 26.0% to $6.10 billion while operating income spiked 37.0% to $3.10 billion.  Cloud revenue grew 50.0% while unit volumes grew 15.0%. Intel’s average selling prices increased 10.0%.  INTC is currently trading at a P/E of 9.7, based on 2019 forecasted earnings per share, which is a 35% DISCOUNT to 5-year median for semiconductor companies.

 

Peak Earnings Fears are Overblown:  Despite the fact that 77% of companies have reported better than expected earnings, investors seem to believe that the combination of additional tariffs, a stronger dollar, and rising material costs may signal that corporate earnings have reached a peak.  We think worries over peak earnings are overblown because it  assumes that every company and sector are all the same and it fails to recognize that companies in various sectors of the market are at very different stages in their growth cycles.   There are a number of industries that have experienced very little growth over the past decade, such as energy, machinery, infrastructure, health care, biotechnology, transportation, robotics & artificial intelligence, etc. that are in the early stages of a long-term growth trend.  Companies are forecasting double digit earnings growth in 2019 and they do not expect any significant deterioration in profit margins.  As additional earnings reports come in this week, hopefully investors will stop reacting to the noise and focus on the data that shows corporate earnings are not going to fall off of a cliff anytime soon!

 

The Federal Reserve May Change its Plans for Raising Interest Rates:  In September the Federal Reserve raised rates by another .25% to 2.25% and they raised some concerns by removing the word “accommodative” from their comments describing their stance on monetary policy.   After the meeting, Chairman Powell tried to relieve these concerns by saying “the change does not signal any change in the likely path of policy” and he also said, “it is a sign that policy is proceeding in line with our expectations.”   In our opinion the Fed needs to reconsider their plans and postpone the December rate hike because inflation is well contained and higher interest rates will have a negative impact on home and auto sales.  The Federal Reserve has said repeatedly that they do not want to jeopardize the economic recovery by raising rates too aggressively.  A number of Federal Reserve officials will be giving speeches over the next few weeks and we expect to hear them start walking back their comments about the timing of raising interest rates prior to the next meeting of the Federal Reserve Board on December 18th & 19th.


Important announcements this week
:

 

  • Earnings: Apple, Facebook, Berkshire Hathaway, Coca-Cola (KO), General Electric (GE), Starbucks (SBUX) and Pfizer (PFE). Chevron (CVX) and Exxon Mobil (XOM) all release earnings this week.

 

  • The October jobs report will be released on Friday and it is expected to improve over September’s hurricane-dampened figure of 134,000 to 193,000. The unemployment rate is expected to remain at 3.7% and wage inflation as measured by average hourly earnings is expected to stabilize at 2.8% year-over-year.

 

Conclusion:  The market seems to be ignoring the fact that U.S. companies are posting fantastic earnings and their balance sheets are the strongest they have been in decades.  The investors that have sold equities during this recent volatility are making irrational investment decisions based on short term noise.  Disciplined investors focus on the data – not the noise and they take advantage of the buying opportunities that have been created by the short term selling.   We believe that the selling has been overdone and the market should get some support from the earnings reports and economic data over the next few weeks.

 

PFA’s Investment Committee:

Jim Reding                          Bob Spindel

Ryan Powers                     Brad Combs

Matt Schaller                    Matt Kellerman

 

 

 

Market Commentary: October 24, 2018


Paradigm Financial Advisors

Market Update

October 24, 2018

 

Global stock markets have experienced increased volatility over the past few weeks as a number of issues have combined to rattle investors.  Investors are concerned about corporate earnings and profit margins, a potential full-blown trade war with China, interest rate hikes by the Federal Reserve, European tensions regarding Brexit and the Italian budget negotiations, the implication of Saudi Arabia in the brutal murder of Jamal Khashoggi, and uncertainty surrounding the upcoming Mid-term elections.

 

A few market commentators have been stirring up fear by predicting that corporate earnings have peaked and that we could fall back into a recession in the U.S. as early as 2019.   Ratings go up when fear rises but the doom and gloom commentators are likely to be wrong again because the economic and earnings data do not indicate any risk of a recession any time soon.  The third quarter earnings reports are forecast to show double digit earnings growth and the most recent economic data indicate that the U.S. economy is the strongest it has been in many decades.  The tax cuts and decreased business regulations will help U.S. companies continue to produce strong earnings going forward.   We believe the recent sell-off has produced an excellent opportunity for investors to rebalance their portfolios to take advantage of very attractive prices.

 

While It is impossible to figure out the exact cause of these short-term market pullbacks, the following “fear factors” likely have contributed to the recent increase in volatility:

 

1) Will the Federal Reserve Raise Rates Too Quickly?

The Federal Reserve, under the new leadership of Jerome Powell, has been very hawkish in their recent outlook for future rate hikes.   They have implied that they will raise rates one more time this December, followed by 3 more rate hikes in 2019.   The problem with this guidance is how they have framed the statements as “tightening” monetary policy and they should change the terminology to “normalizing” monetary policy.  They need to explain that interest rates are still very low compared to historical standards and that if the robust economic conditions continue, they will continue to move rates higher to a more “normalized” level.

Home & Auto Sales:  Home and Auto sales have fallen over the past few months due to higher interest rates.  The Federal Reserve may have to walk back their most recent statements indicating more aggressive tightening after seeing the most recent Housing and Automobile sales data.  Rising interest rates may be hurting home and auto sales more than anyone expected.  If the threat of increased rate hikes continues to hurt the housing and automotive markets, we may see the Federal Reserve move to a more dovish stance on future rate hikes.

Inflation Concerns:   The Federal Reserve is also causing some fears in the market due to their 2% inflation target.  As the U.S. economy strengthens the Fed may face pressure to change its inflation target to a range of 2% to 3%, rather than boxing itself in with the 2% target.  Inflation is not currently an issue in the U.S. or across the globe and we have seen over the past two decades that the globalized economy and technological advances has helped keep inflation in check and we expect this trend to continue going forward.

 

2) Trade War with China:

We believe that the fears of a full-scale trade war with China are overblown and that these fears have created a fantastic opportunity for long term investors.  Most of the Chinese stock market is now trading in bear territory (down over 20%) and is very attractive from a valuation perspective.  We do not believe that our administration or their administration wants this to turn into a full-scale trade war, in that scenario, neither country wins.   We think a breakthrough could happen in the next few weeks which will hopefully set the stage for a meeting between President Trump and Chinese leader Xi Jinping at the multilateral summits which will be held in November.

 

3) Peak Earnings Fears

Many pundits continue to predict that U.S. companies’ profits and margins have peaked and its all downhill from here.  They have been saying this for several years and they continue to be wrong.   This is the second full week of this earnings season and approximately 20% of S&P 500 companies have reported earnings thus far, and we are still expecting total earnings growth of 20% for the quarter (year over year), which will mark the 3rd consecutive quarter of over 20% earnings growth.   The economic data has clearly indicated that the U.S. economy is still growing at a very solid pace at approximately 3%.  The third quarter GDP report will be released this Friday and we believe it may show higher growth than economists have forecasted.

 

4) Will the Tax Cuts Benefit Companies in 2019 and Beyond:

The benefits of the tax cuts have already surpassed what nearly all of the economic forecasters predicted.  However, there is still fear that the Tax Cuts will only benefit the earnings of U.S. companies in 2018.  We believe the tax cuts will continue to help U.S. companies be much more competitive globally and will save U.S. companies millions of dollars EVERY year.  The big surprise that commentators should be talking about is that the tax cuts and reduced business regulations could lead to stronger than expected economic growth in the years to come.

 

5)  European and other Geopolitical Fears:

European political uncertainty continues to weigh on European stocks.  The never-ending Brexit debate continues and the European Union is demanding that Italy change their budget to reduce entitlement spending further and a decision is supposed to be reached in Italy today.  If Italy refuses to change their budget the European Union may take the unprecedented step of demanding Italy take back, revise and resubmit its fiscal plan.

 

6) Midterm Elections: 

President Donald Trump is intensifying his campaign ahead of the midterm elections and is making promises in a bid to ward off Democratic control of Congress. He doubled down on his promise for further tax cuts, saying there would be an additional 10 percent reduction for middle-income families.   President Trump is also promising that the U.S. would outspend any other nation in building up its military defense to answer any challenge presented by Russia and China.  President Trump is also taking a hard line on immigration, saying the U.S. may close the border temporarily and the U.S. may cut off foreign aid to Guatemala, Honduras and El Salvador as thousands of people march north from the region in search of a better life in America.

 

7) Saudi Arabia’s Involvement with the Murder of Jamal Khashoggi:

The Saudi Government has denied involvement but Investors are concerned because their explanation does not seem credible.  The timing of this incident is terrible for Saudi Arabia because they are hosting the Saudi Arabia Future Investment Initiative conference which begins today.  Many countries have pulled out of the conference due to the murder of Khashoggi.  Turkey’s President Recep Tayyip Erdogan is laying the blame for the death squarely at the door of Saudi authorities, dubbing it a planned operation. The markets are concerned that the U.S. and other allies of Saudi Arabia may impose sanctions or take more serious action against them which could have a destabilizing impact on the middle east.  There is very little risk of a major conflict between the U.S. and Saudi Arabia over this but it is still weighing on the global markets because it creates uncertainty.

 

Conclusion:

This is a bump in the road and it has created some excellent buying opportunities.

The media has, and will likely, continue to question whether this is the end of the bull market.  It’s an easy story to push, as we are now in the longest economic recovery in history and the market is near all-time highs.  The odds of a recession are still very low over the next few years, so it is hard to buy into this thinking that we are due for a recession simply because we have not had one in a long time.  A recession is defined as two consecutive quarters of negative GDP growth.  U.S. GDP growth is accelerating not declining and it is forecast to be over 3% during the remainder of 2018.  We believe that many economists are underestimating the impact of the tax cuts and decreased business regulations and that we could see GDP growth in the U.S reach 4% in 2019.

Keep in mind that no bull market has ever died simply of old age. We believe that the recent sell-off has been irrational and it provides us with an opportunity to rebalance our portfolios to take advantage of mispricing in many asset classes.

 

PFA’s Investment Committee:

Jim Reding                        Bob Spindel

Ryan Powers                     Brad Combs

Matt Schaller                    Matt Kellerman

 

 

 

Market Week: October 22, 2018

The Markets (as of market close October 19, 2018)

After a sweat-inducing ride on Wall Street last week, several earnings reports helped ease some of the pain in domestic large caps by Friday’s close. The Dow managed to see a 0.41% rise for the week, while the S&P 500 was relatively unchanged. The Nasdaq, Russell 2000, and Global Dow all saw losses of less than 1%. Observers attributed ongoing volatility to concerns about interest rates and the global economy.

The price of crude oil (WTI) fell once again last week, closing at $69.37 per barrel by late Friday, down from the prior week’s closing price of $71.49 per barrel. The price of gold (COMEX) rose for the third week in a row, reaching $1,230.00 by Friday evening, up from the prior week’s price of $1,221.10. The national average retail regular gasoline price was $2.879 per gallon on October 15, 2018, $0.024 lower than the prior week’s price but $0.390 more than a year ago.

Market/Index 2017 Close Prior Week As of 10/19 Weekly Change YTD Change
DJIA 24719.22 25339.99 25444.34 0.41% 2.93%
Nasdaq 6903.39 7496.89 7449.03 -0.64% 7.90%
S&P 500 2673.61 2767.13 2767.78 0.02% 3.52%
Russell 2000 1535.51 1546.68 1542.04 -0.30% 0.43%
Global Dow 3085.41 2966.51 2965.49 -0.03% -3.89%
Fed. Funds target rate 1.25%-1.50% 2.00%-2.25% 2.00%-2.25% 0 bps 75 bps
10-year Treasuries 2.41% 3.16% 3.20% 4 bps 79 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week’s Economic Headlines

·         Total retail sales inched up 0.1% in September, the same increase as in August. Retail sales are 4.7% ahead of their September 2017 rate. Some retailers enjoyed a strong September, including motor vehicle and parts dealers (0.8%), furniture and home furnishings stores (1.1%), nonstore (online) retailers (1.1%), and electronics and appliance stores (0.9%). Retailers that saw a drop in sales include food services and bars (-1.8%), department stores (-0.8%), and health and personal care stores (-0.3%).

·         The federal budget posted a surplus of $119.1 billion in September — the last month of the fiscal year. For fiscal year 2018, the total deficit was $779 billion, 17% higher than the prior fiscal year deficit of $665.8 billion. For the year, government outlays totaled $4.1 trillion, $3.2 trillion above fiscal 2017. Compared to last year, Medicare spending increased 4.5%, defense spending was 5.3% higher, and net interest expense was 24% greater, reflecting the increased cost to fund the larger government deficit. On the other hand, government receipts for the fiscal year increased by 0.4%, as a 6.1% increase in individual tax receipts was partially offset by a 31% drop in corporate tax receipts.

·         September proved to be another weak month for new home construction. Impacted by Hurricane Florence, building permits (-0.6%), housing starts (-5.3%), and housing completions (-4.1%) each failed to reach their August levels.

·         According to the Federal Reserve, industrial production increased 0.3% in September, about the same rate of change as in the previous two months. In September, manufacturing increased 0.2% and mining advanced 0.5%. The output of utilities was unchanged from August.

·         According to the Job Openings and Labor Turnover Summary, the number of job openings reached a series high of 7.1 million on the last business day of August. The job openings rate was 4.6%. The number of hires in August soared to 5.8 million. The hires rate was 3.9%. Over the 12 months ended in August, hires totaled 67.0 million and separations totaled 64.7 million, yielding a net employment gain of 2.4 million.

·         Existing home sales declined in nearly every region of the country last month, according to the National Association of Realtors®. The Midwest, which reported no change from August to September, was the only region to avoid a drop. Total sales fell 3.4% in September to a seasonally adjusted rate of 5.15 million, representing a 4.1% drop from a year prior and the lowest sales rate since November 2015. Lawrence Yun, NAR’s chief economist, attributed the decline to higher mortgage interest rates and a low level of listings in the “affordable” range.

·         For the week ended October 13, the advance figure for seasonally adjusted initial claims for unemployment insurance was 210,000, a decrease of 5,000 from the previous week’s level. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2%. The advance number of those receiving unemployment insurance benefits during the week ended October 6 was 1,640,000, a decrease of 13,000 from the prior week’s level, which was revised down by 7,000.

Eye on the Week Ahead

The first estimate of the gross domestic product for the third quarter is out this week. Increasing imports, which are a subtraction in the calculation of the GDP, may pull the economic growth rate back from the second quarter’s 4.2%.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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Content has been provided by Broadridge Investor Communication Solutions, Inc.  Broadridge does not provide Investment, tax or legal advice.  The information presented here is not specific to any individual’s personal circumstances.

This publication is provided as a service to clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information and education purposes only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.  The information in these materials may change at any time without notice.  To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.

Market Week: October 15, 2018

The Markets (as of market close October 12, 2018)

Despite a surge at the end of the week, stocks plummeted last week. Each of the benchmark indexes listed here lost value, led by the small caps of the Russell 2000, which fell over 5.0%. The S&P 500, which rebounded last Friday, suffered through its biggest two-day decline last Wednesday and Thursday since early February. The Cboe Volatility Index shot to its highest level since late March last Thursday as trading volumes soared. The cause of the latest stock dump is hard for analysts to determine, and may be due to a combination of the trade conflict between the United States and China, a weakening global economy, and rising interest rates. As investors moved from equities, some money was pushed to bonds, driving long-term bond yields lower as prices rose.

The price of crude oil (WTI) fell back last week, closing at $71.49 per barrel by late Friday, down from the prior week’s closing price of $74.29 per barrel. The price of gold (COMEX) rose for the second week in a row, closing at $1,221.10 by early Friday evening, up from the prior week’s price of $1,206.70. The national average retail regular gasoline price was $2.903 per gallon on October 8, 2018, $0.037 higher than the prior week’s price and $0.399 more than a year ago.

Market/Index 2017 Close Prior Week As of 10/12 Weekly Change YTD Change
DJIA 24719.22 26447.05 25339.99 -4.19% 2.51%
Nasdaq 6903.39 7788.45 7496.89 -3.74% 8.60%
S&P 500 2673.61 2885.57 2767.13 -4.10% 3.50%
Russell 2000 1535.51 1632.11 1546.68 -5.23% 0.73%
Global Dow 3085.41 3076.99 2966.51 -3.59% -3.85%
Fed. Funds target rate 1.25%-1.50% 2.00%-2.25% 2.00%-2.25% 0 bps 75 bps
10-year Treasuries 2.41% 3.23% 3.16% -7 bps 75 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

·         Inflationary pressures at the consumer level remained subdued last month as the Consumer Price Index increased a scant 0.1%. Over the last 12 months, the CPI has risen 2.3%. The index less food and energy rose 0.1% in September, the same increase as in August, and is up 2.2% over the last 12 months.

·         Sellers of domestic goods and services saw their prices rise 0.2% in September, according to the Bureau of Labor Statistics. Prices fell 0.1% in August. Over the past 12 months ended in September, producer prices have risen 2.6%. Prices less foods, energy, and trade services moved up 0.4% for the month, the largest increase since January, when prices rose 0.5%. A closer look at prices shows that services, particularly transportation services, drove the price index. Goods prices actually fell 0.1% for the month, as energy prices dropped 0.8% and food prices fell 0.6%. However, goods prices less foods and energy actually rose 0.2% in September. Overall, price pressures at the producer level remained relatively subdued in September.

·         Import prices rebounded in September, climbing 0.5%, after declining 0.4% in August. Higher fuel prices led the import price increase. For the year, import prices are up 3.5%. Export prices recorded no change in September following a 0.2% drop in August. Export prices have advanced 2.7% for the year ended in September 2018. A strong dollar has kept upward pressures of import prices in check.

·         For the week ended October 6, the advance figure for seasonally adjusted initial claims for unemployment insurance was 214,000, an increase of 7,000 from the previous week’s level. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2%. The advance number of those receiving unemployment insurance benefits during the week ended September 29 was 1,660,000, an increase of 4,000 from the prior week’s level, which was revised up by 6,000.

Eye on the Week Ahead

The housing sector is one segment of the economy that’s been lagging for some time. September’s figures on housing starts and existing home sales may finally show some upward movement, particularly in home prices.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

IMPORTANT DISCLOSURES

Content has been provided by Broadridge Investor Communication Solutions, Inc.  Broadridge does not provide Investment, tax or legal advice.  The information presented here is not specific to any individual’s personal circumstances.

This publication is provided as a service to clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information and education purposes only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.  The information in these materials may change at any time without notice.  To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

This communication is strictly intended for individuals residing in the state(s) of CA, FL, IL, MO and TX. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.

Market Week: October 8, 2018

The Markets (as of market close October 5, 2018)

Another tough week on Wall Street as stocks and long-term bond prices fell, pushing yields higher. While each of the benchmark indexes listed here lost value last week, the large caps of the Dow and S&P 500 held up better than the tech stocks of the Nasdaq and the small-cap Russell 2000. With the continuing rise in oil prices, energy stocks and utilities fared well as did financial shares, which benefitted from a spike in interest long-term rates. On the other hand, tech stocks fell, dropping the Nasdaq to its worst week since early spring. Economic news continues to be somewhat encouraging, making another Fed interest rate hike likely. Speaking of interest rates, they’ve been on the rise, pushing long-term bond prices lower and yields higher.

The price of crude oil (WTI) continued to surge, closing at $74.29 per barrel by late Friday, up from the prior week’s closing price of $73.53 per barrel. The price of gold (COMEX) rose, closing at $1,206.70 by early Friday evening, up from the prior week’s price of $1,195.20. The national average retail regular gasoline price was $2.866 per gallon on October 1, 2018, $0.022 higher than the prior week’s price and $0.301 more than a year ago.

Market/Index 2017 Close Prior Week As of 10/5 Weekly Change YTD Change
DJIA 24719.22 26458.31 26447.05 -0.04% 6.99%
Nasdaq 6903.39 8046.35 7788.45 -3.21% 12.82%
S&P 500 2673.61 2913.98 2885.57 -0.97% 7.93%
Russell 2000 1535.51 1696.57 1632.11 -3.80% 6.29%
Global Dow 3085.41 3121.54 3076.99 -1.43% -0.27%
Fed. Funds target rate 1.25%-1.50% 2.00%-2.25% 2.00%-2.25% 0 bps 75 bps
10-year Treasuries 2.41% 3.06% 3.23% 17 bps 82 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

·         The September unemployment rate fell to its lowest rate since 1969, according to the latest report from the Bureau of Labor Statistics. The unemployment rate declined by 0.2 percentage point to 3.7% in September, and the number of unemployed persons decreased by 270,000 to 6.0 million. Over the year, the unemployment rate and the number of unemployed persons declined by 0.5 percentage point and 795,000, respectively. Job gains for the month were a bit tempered at 134,000, although August’s figure was revised 69,000 higher to 270,000. Over the last 12 months, the average monthly gain sits at 201,000. Jobs were added in professional and business services (54,000), health care (26,000), transportation and warehousing (24,000), and construction (23,000). The average workweek remained unchanged at 34.5 hours in September. The average hourly earnings for all employees rose by $0.08 to $27.24. Over the year, average hourly earnings have increased by $0.73, or 2.8%.

·         While the effects of trade tariffs may still be unknown, the trade deficit continues to expand. According to the Census Bureau, the goods and services deficit was $53.2 billion in August, up $3.2 billion from July. August exports were $209.4 billion, $1.7 billion less than July exports. August imports were $262.7 billion, $1.5 billion more than July imports. In what is sure to impact the third-quarter GDP, exports fell 0.8% in August after dropping 1.0% in July. While service exports actually rose 0.3%, exports of goods declined 1.4%.

·         Reaching a four-month high, the IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 55.6 in September, up from 54.7 in August. Production across the goods-producing sector rose at an accelerated and sharp rate in September due to a sustained rise in new business and favorable demand conditions.

·         In contrast to the Markit PMI™, the Institute for Supply Management® reported that its PMI® registered 59.8%, a decrease of 1.5 percentage points from the August reading. Driving the fall was a drop in new orders. Otherwise, production and employment increased in September.

·         In the non-manufacturing (services) sector, the latest Non-Manufacturing ISM® Report On Business® for September revealed survey respondents were bullish in their assessment of business in the services. In fact, growth in the non-manufacturing sector is moving at a faster rate and is at an all-time high since the inception of the composite index in 2008. Business activity, new orders, employment, and prices all increased in September over their August totals.

·         For the week ended September 29, the advance figure for seasonally adjusted initial claims for unemployment insurance was 207,000, a decrease of 8,000 from the previous week’s level, which was revised up by 1,000. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2%. The advance number of those receiving unemployment insurance benefits during the week ended September 22 was 1,650,000, a decrease of 13,000 from the prior week’s level.

Eye on the Week Ahead

While consumer spending has risen, price inflation has been slow. Out this week are both the Producer Price Index and the Consumer Price Index for September, which are expected to show only marginal price increases.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

IMPORTANT DISCLOSURES

Content has been provided by Broadridge Investor Communication Solutions, Inc.  Broadridge does not provide Investment, tax or legal advice.  The information presented here is not specific to any individual’s personal circumstances.

This publication is provided as a service to clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information and education purposes only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.  The information in these materials may change at any time without notice.  To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

This communication is strictly intended for individuals residing in the state(s) of CA, FL, IL, MO and TX. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.

Market Week: October 1, 2018

 

The Markets (as of market close September 28, 2018)

Rising interest rates and ramped-up trade wars put a damper on stocks last week. While not unanticipated, the Fed raised the federal funds target rate 25 basis points and intimated that another hike is likely for December. On the trade front, the United States imposed tariffs of 10% on $200 billion worth of Chinese goods, prompting the Chinese government to threaten tariffs on $60 billion of U.S. imports. As was the case the prior week, the benchmark indexes listed here ended last week with mixed returns. The tech-heavy Nasdaq posted solid gains while the remaining indexes suffered losses, led by the Dow and Global Dow, each of which fell more than 1.0%.

The price of crude oil (WTI) continued to surge, closing at $73.53 per barrel by late Friday, up from the prior week’s closing price of $70.71 per barrel. The price of gold (COMEX) fell, closing at $1,195.20 by early Friday evening, down from the prior week’s price of $1,203.30. The national average retail regular gasoline price was $2.844 per gallon on September 24, 2018, $0.003 higher than the prior week’s price and $0.261 more than a year ago.

Market/Index 2017 Close Prior Week As of 9/28 Weekly Change YTD Change
DJIA 24719.22 26743.50 26458.31 -1.07% 7.04%
Nasdaq 6903.39 7986.96 8046.35 0.74% 16.56%
S&P 500 2673.61 2929.67 2913.98 -0.54% 8.99%
Russell 2000 1535.51 1712.32 1696.57 -0.92% 10.49%
Global Dow 3085.41 3155.23 3121.54 -1.07% 1.17%
Fed. Funds target rate 1.25%-1.50% 1.75%-2.00% 2.00%-2.25% 25 bps 75 bps
10-year Treasuries 2.41% 3.06% 3.06% 0 bps 65 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

·         For the third time this year, the Fed raised interest rates while projecting another rate hike in December. Last week, the Federal Open Market Committee increased the target range for the federal funds rate 25 basis points to 2.00%-2.25%, marking its highest level since April 2008. In support of its decision, the Committee highlighted ongoing strengthening in the economy, labor, household spending, and business fixed investment. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective. Of particular interest is the fact that the Committee apparently doesn’t see its policy as “accommodative,” language that had been included in several past statements. This change in language could mean the Committee views the current interest rate policy as closing in on the level estimated to sustain full employment and the Fed’s 2.0% inflation target, instead of stimulating the economy.

·         The third and final estimate of the second-quarter gross domestic product came in at a strong 4.2% annualized rate of growth — its fastest pace in almost four years. The GDP grew at an annualized rate of 2.2% in the first quarter. Driving growth in the GDP for the second quarter was increased consumer spending (which accounts for about 75% of economic output), exports, and federal and state government spending.

·         Consumer income and spending continue to surge, while prices for goods and services remain stagnant, according to the latest report from the Bureau of Economic Analysis. In August, both pre-tax and after-tax consumer income rose 0.3% — the same increase seen in July. After climbing 0.4% in July, consumer spending advanced 0.3% in August. On the other hand, inflation at the consumer level was weak, as prices for goods and services inched ahead 0.1% while core prices (excluding food and energy) showed no increase compared to July.

·         Sales of new homes picked up the pace in August after lagging for several months. Sales increased by 3.5% over their July rate. Helping spur the market was increasing inventory and falling prices. The estimate of new homes for sale at the end of August was 318,000, representing a supply of 6.1 months. The median sales price fell to $320,200 in August, down from July’s median price of $328,100. August’s average sales price was $388,400, off slightly from the $389,000 average price in July.

·         New orders for durable goods expanded at a rate of 4.5% in August. The increase was largely driven by a huge jump in the sale of civilian aircraft. Excluding aircraft, new orders for nondefense capital goods actually slipped 0.5%. Excluding transportation, durable goods orders increased only 0.1% in August over July.

·         The international trade in goods deficit expanded in August by 5.3% over July. Exports of goods dropped $2.3 billion, or 1.6%, for the month. Imports increased 0.7%, or $1.5 billion, more in August than July. We may be seeing the effects of the tariff wars curtailing export trade and pushing imports higher.

·         In the week ended September 22, the advance figure for seasonally adjusted initial claims for unemployment insurance was 214,000, an increase of 12,000 from the previous week’s level, which was revised up by 1,000. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2% for the week ended September 15. The advance number of those receiving unemployment insurance benefits during the week ended September 15 was 1,661,000, an increase of 16,000 from the prior week’s level. This is the lowest level for insured unemployment since November 10, 1973, when it was 1,673,000.

Eye on the Week Ahead

September’s employment figures come out this week. Wage growth was prominent in August but may not be quite as strong in September.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

IMPORTANT DISCLOSURES

Content has been provided by Broadridge Investor Communication Solutions, Inc.  Broadridge does not provide Investment, tax or legal advice.  The information presented here is not specific to any individual’s personal circumstances.

This publication is provided as a service to clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information and education purposes only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.  The information in these materials may change at any time without notice.  To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

This communication is strictly intended for individuals residing in the state(s) of CA, FL, IL, MO and TX. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.