Well, that was certainly exciting. Let us get to the numbers straight away and then make some assessments of the implications. For the week-ending October 12, 2018, here is how the major indices and market sectors performed:
As evidenced in the declines for industrials, materials and, to some extent energy as well, there are mounting concerns on the impact of tariffs and sanctions, even with the successful conclusion of the negotiations with Canada and Mexico. The catalyst for this goes back to interest rates. As the ten-year Treasury note closed in on a 3.25% yield, it threatened to break out of a multi-year range. This breakout set off a fear of the unknown among equity investors, many of whom have only known declining rates in their careers. Rather than wait and see what might unfold, many elected to head for the exit. For the record, the yield never got to 3.25%. The flow of funds overwhelmed supply, and the yield ebbed to 3.1498% by the close on Thursday. It was reassuring to see that after a long period of relatively low volatility, this sudden spike did not result in market disruptions. There was adequate liquidity for orderly trading, and there were no reports of large price gaps during the most frenetic episodes last week. There is always informational content in market downturns, and this one was no exception. The concern that the market leadership was over extended and too narrow was not a major element of this episode. As such, it would be safe to assume that investors are still relatively convinced of the economic growth story. The political uncertainty factor played a much greater role in last week’s selling, even down to the capitalization differential, as investors picked transparency and liquidity over valuation and earnings momentum. A positive development last week was the revival of the derivatives market, which in recent years has been missing in action, resulting from the flood of zero cost money the monetary interventions of the central banks created. Now, with short rates climbing and volatility beginning to stir, the incentives to hedge market action have returned, as no longer can losing trades be warehoused due to the cost of carry. There were numerous trades with notional values over a billion dollars hitting the tape last week, as investors sought not only to hedge off risk, but to also profit from a potential rebound.
With earnings reporting season set to get underway, it is reasonable to expect that this episode is not over, and headlines will have an impact. The markets reacted well Friday morning to news before the open that Presidents Trump and Xi Jinping were scheduling a meeting, and the U.S. Treasury announced it was not designating China a currency manipulator, thus sparing us a weekend of dread and parallels to an October weekend in 1987.
For a PDF version of this publication, click here: 10.15.2018_WeeklyMarketOverview
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Source: Unless otherwise noted, all statistics herein obtained from Bloomberg.
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