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Perspectives from Above the Noise -- Week of November 19th, 2018

| November 19, 2018
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Let's Make a Deal. U.S. stocks ended mostly higher last Friday, trimming steep weekly losses after President Trump said he is optimistic about resolving trade disputes with China. The comments came after Beijing sent a broad list of trade concessions that China may be willing to implement, indicating a framework trade deal could be worked out at the upcoming G-20 meeting.

Weekly Performance. For the week, the S&P 500 fell 1.54%, its largest weekly decline since late October. The Dow Industrials fell 2.15% and the tech-heavy Nasdaq Composite lost 2.09%. The broad market S&P 500 is now down 6.35% since its September 20 prior record high of 2,930.

Industrial Production Downshifts. Industrial production expanded at a slower pace last month with Federal Reserve officials noting the recent hurricanes lowered production the past few months. Meanwhile, the Kansas City Fed’s regional manufacturing activity index climbed to 15 for November from eight the month prior.

Real Estate Performs Best. Eight of the 11 major sector groups ended negative last week, with Consumer Discretionary (-3.74%), Technology (-2.37%) and Energy (-1.91%) down the most. Utilities were unchanged, while Real Estate (+0.98%) and Materials (+0.43%) posted gains.

Treasurys Rallied All Week. Treasurys rose with gold a fourth day, amid widespread uncertainty over Britain’s chaotic Brexit plans, helping send the yield on 10-year notes down nearly 12 basis points to end the week at 3.064%. The U.S. Dollar Index fell by 0.45% during the week. Meanwhile, WTI crude oil futures posted its sixth weekly loss on doubts whether OPEC and its allies will reduce production enough to end a global oil glut.

 What We’re Reading
 

Homebuilder Index Drops

Investors Shrug Off Great Earnings

Italy Not Budging On Budget

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 Week’s Economic Calendar
 

Monday, November 19: Housing Market Index;

Tuesday, November 20: Housing Starts & Building Permits;

Wednesday, November 21: Durable & Capital Goods Orders, Leading Indicators, Existing Home Sales, University of Michigan’s Consumer Sentiment;

Thursday, November 22: Thanksgiving Day – All Markets Closed;

Friday, November 23: Preliminary Markit Manufacturing & Services PMIs.

Market Watch
Stocks1-WkMTD3-MonthYTD1-Year
Dow Jones-1.54%1.07%-3.21%4.11%7.89%
S&P 500-2.09%-0.67%-6.90%6.00%7.82%
NASDAQ-1.49%1.03%-4.01%3.49%7.25%
Russell 3000-1.43%0.00%-5.18%-9.27%-6.19%
MSCI EAFE1.05%3.21%-3.03%-13.01%-10.24%
MSCI Emerging Markets-1.54%1.07%-3.21%4.11%7.89%
Bonds1-WeekMTD3-MonthYTD1-Year
Barclays Agg Bond0.47%0.43%-0.84%-1.95%-1.59%
Barclays Municipal0.42%0.35%-0.85%-0.67%-0.40%
Barclays US Corp High Yield-1.29%-1.00%-1.57%-0.08%0.79%
Commodities1-WeekMTD3-MonthYTD1-Year
Bloomberg Commodity1.27%0.97%1.65%-3.21%-0.22%
S&P GSCI Crude Oil-5.99%-13.21%-12.64%-6.19%2.40%
S&P GSCI Gold1.39%1.15%3.80%-6.13%-4.18%
Source: Morningstar
Chart of the Week
Equity Volatility Normalizing from 2017 Lows
 
View larger image »

Volatility has returned this quarter, following a relatively calm summer for U.S. equities. Going through bouts of volatility is normal for stocks. Last year was an outlier based on how calm markets behaved and 2018 is shaping up to have volatility that is more typical of the average year. The S&P 500 has experienced two 10% corrections this year, in February and in October. The max drawdown this year of 10% is slightly below the average of 14% since 1990. In comparison, the max drawdown last year was only 3%. There have been 22 days with a decline of 1% or more for stocks this year. That is significantly above the level reached last year (4), but slightly below the average year since 1990 (31). There were only eight days with a gain or loss of 1% for the S&P 500 last year. That has occurred an average of 63 times per calendar year since 1990 and 49 times in 2018.


 
 
 
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The Bloomberg Barclays US Aggregate Bond Index, which was originally called the Lehman Aggregate Bond Index, is a broad based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included. Eligible bonds must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 8.25 years. This total return index, created in 1986 with history backfilled to January 1, 1976, is unhedged and rebalances monthly.

The Bloomberg Barclays US Corporate High Yield Index measures the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt. Payment-in-kind and bonds with predetermined step-up coupon provisions are also included. Eligible securities must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 6.3 years. This total return unhedged index was created in 1986, with history backfilled to July 1, 1983 and rebalances monthly.

The Bloomberg Barclays US Municipal Bond 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. Many of the subindicies of the Municipal Index have historical data to January 1980. In addition, several subindicies based on maturity and revenue source have been created, some with inception dates after January 1980, but no later than July 1, 1993. Eligible securities must be rated investment grade (Baa3/BBB- or higher) by Moody’s and S&P and have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 12.8 years. This total return index is unhedged and rebalances monthly.

The Bloomberg Commodity Index is a broadly diversified index that measures 22 exchange-traded futures on physical commodities in five groups (energy, agriculture, industrial metals, precious metals, and livestock), which are weighted to account for economic significance and market liquidity. No single commodity can comprise less than 2% or more than 15% of the index; and no group can represent more than 33% of the index. However, between rebalancings, group weightings may fluctuate to levels outside the limits. The index rebalances annually, weighted 2/3 by trading volume and 1/3 by world production.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Introduced in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

The MSCI All-Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The SMCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. The developed country indexes include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the Uninted States. The emerging market country indexes included are: Brazil, Chile, China, Colombia, Czech Republic, Eygpt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

The MSCI EAFE Index is designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted.

The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe.

The MSCI Pacific Index captures large and mid-cap representation across five Developed Markets (DM) countries in the Pacific region. With 470 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 31% of the total market capitalization of the Russell 1000 companies.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

The S&P GSCI Crude Oil Indexis a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the crude oil market.

The S&P GSCI Gold Index a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold futures market.

West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.

The U.S. Dollar Index is a weighted geometric mean that provides a value measure of the United States dollar relative to a basket of major foreign currencies. The index, often carrying a USDX or DXY moniker, started in March 1973, beginning with a value of the U.S. Dollar Index at 100.000. It has since reached a February 1985 high of 164.720, and has been as low as 70.698 in March 2008.

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