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Perspectives from Above the Noise -- Week of November 5th, 2018

| November 05, 2018
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Stocks Rebound After October Rout. U.S. stocks closed lower on Friday, ending its first three-day rally since September 20, but the S&P 500 still recorded its best week in over six months. Stocks trimmed about half the day’s losses after President Trump said progress is being made towards talks that will help resolve trade disputes with China. Overall, positive earnings and economic data helped assuage earlier October disappointments that had brought the S&P 500 down 6.8% in October, its worst monthly decline since 2011.

Weekly Performance. For the week, the S&P 500 rose 2.45%, the Dow Industrials gained 2.36%, while the tech-heavy Nasdaq Composite rebounded 2.66%, its first weekly gain since September 28. Overseas, emerging-markets shares jumped 6.09%, its largest weekly gain since March 2016.

Payrolls Push Higher. U.S. payrolls rose by 250,000 last month, widely surpassing economists’ forecasts, while September job gains were revised slightly lower. Average hourly earnings rose 3.1% from a year ago, its strongest increase since the financial crisis. The unemployment rate held steady at 3.7%. Separately, factory orders rose more-than-expected in September (0.7% versus 0.5%) and are up 8.4% from a year ago.

Cyclical Stocks Perform Best. Ten of the 11 major sector groups ended with gains last week, with Materials (+6.14%), Financials (+4.50%) and Consumer Discretionary (+4.00%) up the most. Technology (+0.99%) rose the least, while Utilities (-0.51%) lagged.

Treasury Yields Rise. Treasury prices slid lower last week, sending the yield on 10-year Treasury notes up the most in a month (+13.7 basis points) to end the week at 3.213%. The U.S. Dollar Index rose 0.019% over the week, ending at 96.542, while WTI crude oil plunged 6.58% last week to $63.14/barrel amid supply disruption fears.

 What We’re Reading
 

Job Growth Soars

Wait & See on Mid-term Elections

Correlation Between Oil & Stocks

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 Week’s Economic Calendar
 

Monday, November 5: Markit Services PMI, ISM Non-Manufacturing Index;

Tuesday, November 6: : JOLTS Job Openings;

Wednesday, November 7: Mortgage Applications Activity;

Thursday, November 8: Jobless Claims, FOMC Interest Rate & Policy Decisions;

Friday, November 9: Producer Prices, Consumer Sentiment, Wholesale Inventories.

 Market Watch
Stocks1-WkMTD3-MonthYTD1-Year
Dow Jones2.36%0.62%-0.22%2.23%7.47%
S&P 5002.45%0.43%-3.22%3.45%7.61%
NASDAQ2.66%0.70%-5.47%7.46%10.72%
Russell 30002.74%0.68%-3.78%3.13%7.22%
MSCI EAFE3.36%1.22%-6.49%-8.17%-6.26%
MSCI Emerging Markets6.09%4.27%-6.17%-12.12%-9.45%
Bonds1-WeekMTD3-MonthYTD1-Year
Barclays Agg Bond-0.73%-0.28%-0.97%-2.65%-2.46%
Barclays Municipal-0.47%-0.27%-1.17%-1.28%-0.80%
Barclays US Corp High Yield0.22%0.18%-0.19%1.11%1.17%
Commodities1-WeekMTD3-MonthYTD1-Year
Bloomberg Commodity-1.26%0.85%-0.19%-3.33%-1.48%
S&P GSCI Crude Oil-6.58%-3.32%-8.44%4.50%15.78%
S&P GSCI Gold-0.20%1.51%1.08%-5.80%-3.51%
Source: Morningstar
Chart of the Week
Labor Market Strength Eases Economic Fears
 
View larger image »

October was a standout month for the labor market. The U.S. economy added 250,000 jobs last month, well ahead of expectations for 190,000 openings to be filled. The unemployment rate held steady at a 49-year low of 3.7% and year-over-year wage growth accelerated to its highest level of the current nine-year expansion, reaching 3.1%. Normally labor market gains decelerate later in an economic cycle, however, there has been an acceleration in labor market growth in 2018 even though the U.S. is 112 months into this expansion (second longest in U.S. history).

Monthly jobs growth has averaged 212,000 this year, which is the highest through the first 10 months of the year since 2015. We anticipate that wage growth pressures will continue because of the combination of tightening labor market conditions and strong economic growth. These factors are likely to keep the Fed on its current path of normalizing interest rates and a rate hike in December appears more likely after Friday’s labor market report.

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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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