FYI: What Happened in the Markets? • US stocks sold off sharply on Wednesday as the S&P 500 shed 85 points, or 3.1%, to close at 2,656. The Dow Jones Industrial Average lost 600+ points and the NASDAQ Composite also gave back 4.4%. • There appeared to be several catalysts that weighed on markets. Traders appeared to focus in on cautious guidance and disappointing earnings reports from several companies, with the market punishing firms that have missed expectations this earnings season in greater magnitude than it has rewarded companies that have beat. Outside of company reports, a disappointing new home sales print in the US also appeared to weigh on sentiment. While there was little in the way of new updates, geopolitics also remain at the forefront with US/China trade relations, Saudi Arabia, and Italy among the issues in focus. • Eight of 11 S&P sectors finished the day lower with defensive-oriented Utilities (+2.3%), Real Estate (+1.1%) and Staples (+0.5%) bucking the sell-off and finishing in the green. Communication Services (-4.9%) and Tech (-4.4%) were the big laggards. • Outside of the equity market, there were several notable moves across asset classes. Treasuries rallied with the 10-year yield settling below 3.11% as of the 4 p.m. equity market close. The dollar rallied modestly on the day, with the US Dollar Index up +0.4% on the session. Gold and Oil were little changed on the session.
Catalysts for Market Move A risk-off day for US stocks as the S&P 500 fell 3.1%, marking the 13th down day in the past 15 sessions. The NASDAQ and Dow Jones Industrial Average also faced acute selling, falling -4.4% and -2.4%, respectively. The defensive-oriented Utilities, Real Estate, and Staples sectors managed to buck the trend of weakness while cyclically oriented sectors sold off. Communications Services (-4.9%) and Tech (-4.4%) were the hardest hit as disappointing earnings from several companies dragged down the index and investors exited large internet stocks ahead of several big earnings reports expected later this week. It was the tech-heavy NASDAQ Index’s worst day since August 2011. With the session’s sell-off, both the Dow Jones and S&P 500 moved slightly into the red for the year, with both indices now having given up all of the gains experienced through the first three quarters of 2018. After rallying ~10% at its peak for the year, the S&P 500 is now off 8.8% in October. Were the month to end today, it would mark the worst monthly performance for the index since February 2009. Early through third quarter earnings season and with roughly 30% of S&P 500 constituents having reported, results are largely coming in ahead of expectations. 87% of reporting companies have beaten earnings per share estimates, with results coming in 4% ahead of consensus expectations in aggregate. On the top line, 65% of reporting companies have topped sales estimates, with results coming in aggregate 0.6% ahead of consensus expectations. While results have largely been strong so far, the market appears to be punishing those companies that have missed expectations, either in trailing results or forward guidance, to a greater degree than it has rewarded those companies that have beaten expectations.
The Global Investment Committee’s Outlook
Following a strong 2017 characterized by robust global growth and supportive financial conditions, 2018 has presented a significantly more challenging investment environment. Financial conditions have tightened, some economic data have begun to roll over, and interest rates are on the rise. For equities, this has translated into a “rolling bear market,” with different regions, sectors, and styles taking their turn at falling out of favor and succumbing to market corrections. US equities, particularly Technology and Internet related stocks, along with small-caps, appeared to be the last large swaths of the market that had yet to correct through the first three quarters of this year. The GIC believes this led to extreme crowding in some of these pockets of the market. The market pullback seen this month has begun to target these prior “safe havens.” The GIC reiterates its recommendation that it has maintained since August that investors should look to fade strength in US equities, favoring Value over Growth stocks in the US and International developed equities over US exposure. With US growth likely peaking and 10-year rates having moved higher alongside a flattening yield curve, the GIC maintains a preference for defensive/valueoriented sectors. Of the pure defensive sectors, the GIC favors Utilities, Staples and Telecos, and on the more cyclical side, the GIC also likes Energy. Within fixed income, the GIC recommends US-only positioning with no exposure to high yield and some TIPS as inflation expectations recover further with a stable/weaker dollar, rising oil prices, and a tighter labor market.
Regards,
Ted
