Global equity markets declined last week, as investors grappled to balance the potential for economic deceleration with positive corporate growth forecasts. A large portion of last week’s trading represented yet another series of reversion to the mean price actions. After enduring a precipitous decline following the market peak on September 20th, the basic materials sector turned one of only two positive price moves, picking up 0.47%. With interest rates slipping back last week, the utility sector managed last week’s only other positive price movement, rising a fractional 0.02%. The heaviest selling pressure for the week fell on the consumer discretionary stocks, as same-store sales data for Nordstrom, Macy’s and Kohl’s resulted in double-digit percentage declines for these department store brands that served to take the group down 3.32%. Technology shares suffered the second worst decline last week, with the group falling 2.33%. In technology, the weakness was widespread, but the most notable declines were among companies such as Invidia, that have been associated with demand for crypto currencies. The recent price decline of Bitcoin and others led to a drop in demand for the technology needed to mine and process blockchain transactions. Surprisingly last week, the decline in interest rates did not produce a shift of investor preference back to growth over value. As measured by the Russell 1000 Index, value fell only 0.72% to growth’s -2.22%. In global stock prices, emerging markets rallied 1.04%, while the developed markets lost 1.45%, a virtual reversal of the prior week’s price action. Part of the bounce experienced by the materials stocks is attributable to a positive week for commodity prices, as the group enjoyed broad-based price gains despite the continued drop experienced by crude oil. Precious metals added over 1%, while industrial metals, led by a 2.5% rise in copper, were higher as well. Soybeans led the agricultural sector with a gain of 1.94%. Domestic natural gas continues to rally. After trading at or below $3 per Mcf1 for most of the year, it has now crested the $4.25 level, picking up 15% last week alone.
Exhibit 1, extracted from a recent Bloomberg article, demonstrates how much the world has changed in recent years and highlights how oil production has shifted. The U.S., Russia and Saudi Arabia now account for as much crude oil output as the remainder of OPEC combined. The article goes on to point out that these three producers have entirely different agendas than those long held by OPEC members. Further complicating the outlook for energy, the International Energy Agency lowered its demand growth forecast for 2019 this week. This will also serve to complicate the deliberations of the Federal Reserve policy makers, as falling energy prices will have an impact on inflation and economic growth. As we have experienced in the equity markets in recent weeks, fear of the unknown continues to haunt investors. Will the policy makers continue to raise rates? Right now, the bond market is saying ‘no’. Will stable interest rates aid equity valuations? Again, the immediate answer has been ‘no’ as well. But the underlying corporate fundamentals are still positive. The emerging bottoms up earnings outlook for the S&P 500® Index for 2019 forecasts a 9% rise, driving a 1.2% increase in the return on equity for investors. Hardly a gloomy prospect and, given recent price weakness, it places a 15 times earnings multiple on the market. While not cheap by any measure, it is far less risky than it has been.
Exhibit 1 (Source: Bloomberg) Note: Includes crude, condensates, and natural gas liquids
11,000 cubic feet of natural gas
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