Posted November 1, 2018

Tech Weakness Send Market Sharply Lower

We said last month that October has a bad reputation and it certainly lived up to that reputation this year. Coming off the best quarter for stocks in 5 years we were not surprised to see some profit taking, but we were surprised at the extent of the selling.  After hitting a new all-time high in the first few days of the month, the market traded sharply and steadily lower for most of the month.  The reasons for the decline range from the mid-term elections, to rapidly rising interest rates, to concerns about trade tariffs, to worry about a slowing economy, both here and abroad.  The tech sector has led the advance over the last couple of years and selling in that sector weighed on the overall market.  Despite a 2 day 2.7% rally at month end, the S&P 500 lost 6.9%, its worst monthly performance in 7 years, and the widely followed index is now up just 1.5% for the year.  Oil prices, after hitting a multi-year high in early October, ended the month with a loss of nearly 11%, and market leader Amazon, after gaining 50% this year, plunged 25% during October.  The tech heavy NASDAQ lost 10.9%, its worst monthly performance in 11 years.

The month began with an optimistic tone as Canada joined Mexico and the U.S. in a new trade agreement to replace NAFTA. The first few days of the month saw oil hit a 4-year high and the market hit a new all-time high, but interest rates moved to a 7 year high.  We expect interest rates to rise in an accelerating economy, but late in the week the pace of the increase started to cause problem for the market, sending it to its worst day in 2 months.  The selling continued into Friday despite a report that unemployment hit a 49 year low.  The S&P 500 ended the week with a 1% loss and the tech heavy NASDAQ had its worst week since March.  During the second week the selling picked up steam as interest rates continued to march higher.  The S&P 500 had its longest losing streak in 2 years and the selling in tech stocks weighed on the overall market.  Good earnings on Friday help mitigate some of the losses, but the S&P 500 ended the week 4.1% lower, its worst week in 7 months.  The third week was back and forth with the market having its best day in 7 months on Tuesday, but selling pressure continued for the remainder of the week, this time on concerns about a weakening Chinese economy, and the S&P 500 ended the week unchanged.  Earnings were in focus during the last full week of the month and disappointing results from market leaders 3M, Caterpillar and Amazon helped send the market lower.  Despite a better than expected Q3 GDP report on Friday the S&P 500 lost another 4% for the week.  Weakness in technology stocks continued to weigh on the market this week, but when that sector firmed up during the last 2 days we saw a nice rally to end a tough month.

We have often said that history is simply a guide and not an absolute, but November begins a 3 month stretch that has often been favorable for the markets. November has, on average, showed a gain of nearly 1% and closed higher 60% of the time.  The 3 month period that runs from November thru January has historically seen 50% of all gains for the entire year.  We are likely to be dealing with many of the things we were watching in October, rising interest rates, corporate earnings and trade tariffs.  If there were to be some agreement with China on tariffs we would expect the market to react favorably, but a prolonged conflict would be problematic.  Technology has been the leadership group in the market advance, so renewed strength in that space is critical to the market.  In a strong economy you would expect price to earnings ratios to be elevated and, despite the October decline, those ratios are still on the high side of normal.  In the short-term, mid-term elections next week are likely to be market movers, but these short-term moves are generally not a long term trend.

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