Weekly Market Overview | October 7, 2019

Peter A. Sorrentino, CFA

stock figures and chart

For the third week in a row, selling pressure drove energy stocks lower, falling another 3.8%.



Domestic Equity Overview:
For the third week in a row, selling pressure drove energy stocks lower, falling another 3.8%. Last week’s ISM data set off selling among the cyclical stocks, hitting Industrials and Materials for losses of 2.5%. Rounding out the decline in cyclical stocks, Financial Service lost 2.2% on fears of lower loan demand and more pressure on lending spreads. But as it has been in the prior weeks, not everything declined, as Technology and Health Care shares were up 1%, with Consumer Staples and Communication Service picking up roughly half of a percent. Marking the second week in a row, the selling fell heaviest on the shares of smaller companies as witnessed by the 1.3% drop in the Russell 2000® Index, versus the smaller 0.03% decline posted by the Russell 1000® Index. With interest rates on bonds declining, investors focused on growth as witnessed by the 0.6% gain for the Russell 1000® Growth Index, versus the decline of 1.2% for the Russell 1000® Value Index. Saving the week from even larger declines was a better-than-anticipated report on job growth. Even though the numbers declined, revisions to previous months showed better growth, and the September results were better than many analyst forecasts.

International Equity Overview:
The US dollar was weaker on the ISM data. The result being that emerging markets posted only fractional losses, with the MSCI Emerging Market Index slipping just half a percentage point. Western Europe sustained larger losses last week, as the Brexit maelstrom took 3.5% out of the FTSE 100 Index. There was a domino effect to the other major markets, pulling them down roughly 2.5% for the week. Major markets in Asia fell prey to political perils as well, with Japan down on the approach of the increase on the nation’s VAT tax, while markets in China suffered from the intensification of the civil unrest in Hong Kong.

US Fixed Income Overview:
US Treasury yields were again the beneficiary of selling amongst equities. The largest declines were seen in the yields for securities with maturities of seven years or less. This part of the term structure declined by roughly 20 basis points last week. Municipal bond yields declined to a much smaller extent than did Treasury yields, with the bulk of the decline concentrated in the short to intermediate maturities.

Commodity Overview:
Crude oil, for the third week, led the decline among commodities, falling 5.5%. As a result, the price of regular unleaded dropped 4.7%. Industrial metals followed copper, as the benchmark metal slipped 2.2% on both the ISM data in the U.S. and concerns that China’s growth is slower than the official numbers indicate. The bright spot for the week were agricultural prices, with soybeans picking up 3.8% and corn gaining 3.6% on stronger buying in the spot market.

***

In Exhibit 1, you will see the change in interest rates over the last twelve months. While the absolute change may not seem like much, on a relative basis, yields have fallen by almost 60%. For savers, this is catastrophic; for the equity market, it is a huge safety cushion. Lower for longer supports higher valuations on stocks. It is also likely to perpetuate investors' preference for growth stocks over value. Yes, it is a symptom of an economy operating perilously close to stall speed, but with a low cost of carry, this environment will likely be the siren song luring investors back to equities.

Staying the course at times like this is very difficult and can be viewed as a contrarian approach, but financial plans are constructed with such scenarios in mind and selling out is the worst thing to do at the worst time possible. As I have said before, unless you seriously believe we are destined to live in caves wearing bear skins and carrying stone tools, an optimistic view of the future has proven to be the profitable one.



10.07.19_Chart
10.07.19_Performance

For a PDF version of this publication, click here: 10.07.2019_WeeklyMarketOverview

October 7, 2019
Peter A. Sorrentino, CFA, Senior Vice President and Chief Investment Officer of Comerica Asset Management Group

Peter A. Sorrentino, CFA

Senior Vice President and Chief Investment Officer, Comerica Asset Management Group

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