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Perspectives from Above the Noise -- Week of October 22nd, 2018

| October 22, 2018
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Tarriff Concerns Appear in Earnings Guidance. U.S. stocks gave back strong intra-day gains on Friday to finish mixed as investors assessed generally positive earnings results and geopolitical concerns. Tariff tensions were re-ignited after a leading industrial conglomerate firm downwardly revised their quarterly sales and earnings outlooks due to increased costs resulting from higher international duties. Meanwhile, the week ended little changed on the same issues, plus uncertainty surrounding Brexit and Italy’s budget woes.

Weekly Performance. For the week, the S&P 500 ended virtually flat, up less than one-point, or 0.05%, the Dow Industrials rose 0.41%, while the tech-heavy Nasdaq Composite fell 0.64%, its third weekly decline.

Key Economic Data Last Week. A slump in restaurant sales degraded an otherwise robust September retail sales report, (0.1% vs. 0.6% expected), while new job openings waiting to be filled rose to 7.14 million in August, a new record. On Wednesday, the meeting minutes from the Federal Reserve’s September policy meeting revealed a majority of members believe interest rates should rise enough in 2019 to become temporarily restrictive to slow an overheated economy.

Defensive Stocks Perform Best. Six of the 11 major sector groups ended positive last week, led by Consumer Staples (+4.42%), Real Estate (+3.22%) and Utility companies (+3.05%). Consumer Discretionary (-1.97%), Energy (-1.92%) and Materials (-1.34%) fell the most.

Treasury Prices Fell Last Week. Treasury prices eased on Friday and on the week, sending the yield on benchmark 10-year Treasury notes up 3.1 basis points last week, ending at 3.193%. The U.S. Dollar Index strengthened to end the week up 0.52% at 95.713, and U.S. WTI crude oil fell 3.1%, ending the week at $69.12/barrel.

 What We’re Reading
 

Global Growth Worries

Brexit Deal 90% Complete

Shale Oil Output Hits Record

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 Week’s Economic Calendar
 

Monday, October 22: Chicago Fed National Activity Index;

Tuesday, October 23: Richmond Fed Manufacturing Index;

Wednesday, October 24: Markit Manufacturing, Services and Composite PMIs, New Home Sales, Beige Book;

Thursday, October 25: Jobless Claims, Trade Deficit in Goods, Wholesale & Retail Inventories, Durable & Capital Goods Orders, Pending Home Sales;

Friday, October 26: 3Q GDP Estimate, Personal Consumption & Core Prices, Consumer Sentiment.

Market Watch
Stocks1-WkMTD3-MonthYTD1-Year
Dow Jones0.41%-3.83%1.52%2.93%9.86%
S&P 5000.05%-4.93%-0.84%5.11%10.14%
NASDAQ-0.64%-7.40%-4.56%8.78%13.97%
Russell 3000-0.01%-5.51%-2.00%4.48%9.27%
MSCI EAFE-0.07%-6.24%-5.57%-7.58%-5.26%
MSCI Emerging Markets-0.88%-7.24%-7.90%-14.37%-10.93%
Bonds1-WeekMTD3-MonthYTD1-Year
Barclays Agg Bond-0.37%-0.88%-1.24%-2.46%-2.21%
Barclays Municipal0.05%-0.72%-1.28%-1.11%-1.04%
Barclays US Corp High Yield-0.05%-0.94%0.85%1.60%1.64%
Commodities1-WeekMTD3-MonthYTD1-Year
Bloomberg Commodity-0.29%1.01%4.02%-1.04%2.43%
S&P GSCI Crude Oil-2.67%-5.42%1.52%14.66%34.53%
S&P GSCI Gold0.55%2.72%-0.43%-6.16%-4.76%
Source: Morningstar
Chart of the Week
Annualized Retail Sales Still Healthy
 
View larger image »

U.S. retail sales growth slowed to 0.1% month-over-month (M/M) in September, well below expectations for growth of 0.6%. Moreover, retail sales growth fell to a six-month low of 4.7% when measured on a year-over-year basis. That is still a healthy level of growth, but it is a concern if retail sales growth experiences progressively weaker increase figures in the months ahead. Overall, consumer spending figures remained strong in the third quarter despite a disappointing September. Additionally, consumer confidence is at an 18-year high, providing optimism for consumer strength in future months. Economic activity remains strong in the U.S., potentially setting up a second consecutive quarter of 4.0% plus GDP growth for the first time since 2014. At present, the Atlanta Fed GDP Now tracker is projecting 3.9% GDP growth in the third quarter. Other key economic indicators including industrial production, manufacturing PMI, non-manufacturing (service activity) PMI, and capital goods orders all indicate that economic growth in the third quarter was likely strong.

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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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