Despite positive returns in most asset classes, November proved to be another volatile month, which included a Thanksgiving Week to forget, at least from a stock market perspective. The Dow Jones Industrial Average, which tracks 30 large blue-chip companies, had its worst Thanksgiving week since 2011 as stocks gyrated around during the shortened trading week.
The S&P 500 gained 2.0% on a total return basis for the month of November and rose 5.1% for the year-to- date-period. But those gains masked a fair amount of volatility: from peak to trough during the month, the S&P 500 fell by 6.4%. The decline wasn’t as harrowing as October’s, but it served as a reminder that markets can be volatile. Small-cap issues continued to lag, though the Russell 2000 also managed to post gains of 1.6% for November and 1.0% for the year to date.
From a technical perspective, the market has been clearly bruised from the volatility of the last two months. Less than a third of stocks remain above their 200-day moving averages, a signal that stocks’ momentum is declining. Only more-defensive sectors such as Consumer Staples, Real Estate and Utilities are experiencing more positive momentum. In addition, the number of days with large moves has increased. After an extraordinarily placid 2017, the S&P 500 has now experienced three days with +3% moves.
The flip side of technical damage is that the stocks are at their cheapest level this year. The S&P 500’s price relative to last twelve months of earnings is 18x, compared to 22x at the start of the year.
The Health Care sector was a clear winner post the November mid-term elections. With the Democrats gaining control of the House of Representatives, it became likely that the Affordable Care Act would remain intact. In addition, several states voted to support measures to expand Medicaid. Between both of these health programs, as many of 600,000 individuals could be eligible to gain medical coverage, which broadens out the number of people that health care companies can serve. For more on this topic, you can watch my interview on Nightly Business Report: https://www.youtube.com/watch?v=_nXeQFSDZ-Y&feature=youtu.be&t=529.
Technology stocks fared the worst in November with the sector down 1.9%, after having fallen by 8.0% in October. Particularly hard hit were the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, Google). These former darlings of the market collectively peaked in June of this year and have been sliding downward since. While several of these names have struggled with company-specific issues, such as privacy concerns and dwindling demand for key products, the group is also suffering from a shift in sentiment, away from more expensive, faster growing companies. Despite these pressures, the sector is still among the best performing areas of the market, up 8.9% year to date.
The broad-based Bloomberg Barclays US Fixed Income Aggregate index bounced slightly after a disappointing October, closing November up 0.6%. In concert with increasing concern about economic growth, long-term Treasury yields declined, pushing those bond prices up. In particular, the Bloomberg Barclays 10-20 Year Treasury index led bond returns, increasing 1.7% for the month. The index remains in negative territory for the year to date, however, with a decline of 3.7%. Shorter-term Treasury issues were up only marginally for the month, but are one of the few areas of the fixed-income market in positive territory for the year.
The Economy and the Fed:
Though economic indicators are robust, they are decelerating, which suggests slower economic growth next year. Manufacturing is one such example. One of the most reliable, contemporaneous indicators for economic activity is the Institute for Supply Management’s Purchasing Managers’ Index, also known as PMI. The latest reading for November was 59.3%, which indicates that activity remained near the highest levels of the last 20 years. Despite that high level, the index has ticked lower in each of the previous three months.
Dragging down activity were tariffs and a shortage of qualified workers. Interestingly, US manufacturing activity remains much stronger than the rest of the world. So even as the US decelerates, the economic picture at home is much more robust than abroad.
An additional cause for concern is the yield curve. Typically, longer-dated bonds have much higher yields than shorter-dated bonds as investors want to be paid more in return for having to wait longer to receive a return on their investment. But as the Federal Reserve increases short-term interest rates and long-term rates sink, the distance between those rates has narrowed. As of December 5, that spread reached just 12 basis points, the lowest level since 2007. Since 1950, every time the yield on a 10-year Treasury bond has dipped below the yield on a 2-year Treasury bond, the US economy has dipped into a recession within six months to two years. So the yield curve is close to signaling a recession – but just because it’s close, does not mean it will happen. In the 1990s, that same measure bounced between 0 and 50 basis points for several years as the stock market posted very strong returns. Amidst the slowing economic activity and flattening yield curve, the Federal Reserve appeared to turn more dovish, signaling that perhaps rate increases are nearing an end.
As we’ve stated in the prior commentaries, we believe that we’re closer to the latter stages of this economic expansion than we are to its beginning. Therefore, the Federal Reserve raising rates, and the flattening of the yield curve are natural occurrences and are reflective of an economy that has worked its way through the “healing stage,” and is now deep into the “boom.”
Looking into 2019, we still see the economy growing and corporate earnings increasing, though at a slower pace than what we’ve become accustomed to. That said, we should also expect higher levels of volatility during this stage in the cycle as financial conditions continue to tighten, and market participants grapple with the question of when the boom will turn to slower growth, and ultimately when the slowing will turn to contraction. Nobody knows with any reliability the timing of when we’ll enter the next natural stage of the cycle, or when the market’s dips will lead to larger downturns. But, what we do know is that a well-crafted, long-term financial plan incorporates thousands of different market cycle simulations – bulls and bears, expansions and contractions – all to help our clients meet their goals no matter the near-term gyrations in the market.
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Definitions: S&P 500 Index: A broad based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a capitalization-weighted, unmanaged index that is calculated on a total return basis with dividends reinvested. The S&P 500 represents about 75% of the NYSE market capitalizations.
Russell 2000 Index: This index measures the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.
MSCI Europe, Australasia, and Far East (EAFE) Index: This index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
MSCI Emerging Markets Index: This index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of June 2009 the MSCI Emerging Markets Index consisted of the following 22 emerging market country indices: Brazil, Chile,
China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Bloomberg Barclays U.S. Aggregate Bond Index: A market capitalization weighted bond index of investment grade U.S. dollar-denominated fixed- income securities.
Bloomberg Barclays Municipal Bond Index: The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre- refunded bonds. Gold (spot): Gold price per ounce in US Dollars.
S&P 500 GICS Sectors Level-1: In 1999, MSCI and S&P Global developed the Global Industry Classification Standard (GICS), seeking to offer an efficient investment tool to capture the breadth, depth and evolution of industry sectors. GICS is a four-tiered, hierarchical industry classification system. It consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries. Companies are classified quantitatively and qualitatively. Each company is assigned a single GICS classification at the sub-industry level according to its principal business activity. MSCI and S&P Global use revenues as a key factor in determining a firm’s principal business activity.
Earnings and market perception, however, are also recognized as important and relevant information for classification purposes, and are taken into account during the annual review process.
Kara Murphy is the Chief Investment Officer at United Capital. During her nearly 20-year tenure in the industry, she has steadily assumed increasing responsibilities and is currently one of the industry’s few female chief investment officers. Previously, she was Chief Investment Officer at SunAmerica Asset Management, LLC, an AIG subsidiary. During her time as CIO, assets grew from $28 billion to $50 billion, making SunAmerica one of the fastest growing asset managers in the industry. She is a CFA® charterholder, a member of the New York Society of Security Analysts, and a member of the New York Society of Quantitative Analysts. Throughout her career, Kara has enjoyed mentoring and supporting women and other underrepresented groups within finance.
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