Market Commentary, 11/12/18

Last week the Dow was up 718 points for a 2.8% gain, the S&P 500 closed up 2.1% and the Nasdaq was + 0.7%. The Dow and S&P 500 exceeded 2% gains for the second week in a row and recovered much of the October decline.

As has often been the case with midterm elections, stocks rallied the day after Election Day (e.g., the Dow gained 550 points on Wednesday, 11/07/18).

Before last Tuesday, election uncertainty was one of the factors driving October’s market decline. It was generally believed that Republics would lose the House because that’s the way things happen in mid-term elections – the president’s party almost always loses seats in both houses of congress. Investors felt that if Democrats won control of the House and Senate, their radical, anti-growth economic policies would hurt businesses that have benefited from tax reform and the easing of regulations and have been hiring like we haven’t seen in several decades. Democrats did win control of the House but the fact that Republicans retained and in fact, increased their control of the Senate, soothed some of those fears, sparking the broad market rally on Wednesday. In fact, in this midterm election the incumbent president’s party did better than in most recent history midterms.

In spite of the false and/or skewed rhetoric of many major media outlets, many if not most Americans are aware that the US economy is doing extremely well:

1. Unemployment is at a multi-decade low (e.g. the number of Americans collecting new unemployment benefits and the number already receiving unemployment benefits have both fallen to the lowest levels in almost 50 years. In fact, layoffs have been extremely low for a long stretch. (Source: Sherman Sheet)

2. GDP for the 2nd quarter was 4.2% (the highest since 2014) and the 3rd quarter (Jul, Aug, Sep) estimate is 3.5%.

3. Regarding corporate earnings, of the 242 S&P 500 companies that have reported earnings in the past several days, 79% have reported earnings that exceeded analyst estimates. Company earnings are on pace to grow at 25.3% (Q3) and our expectation is that the market will follow the earnings. (www.thompsonreuters.com)

Last Thursday the Fed left interest rates unchanged but they did emphasize the economy’s strength and reiterated their plan to keep interest rates rising at a steady pace. Thus the expectation is that the Fed will raise rates for the fourth time this year at their December meeting.  (www.wsj.com)

Stock Market Volatility: After experiencing 36 daily moves in more than 1% in the first half of 2018, things settled down and in Q3 there wasn’t a single daily move of 1% or more. But since the second week of October there have been twelve daily moves of more than 1% (including three daily moves greater than 2% and two greater than 3%).

Despite recent volatility, the underlying fundamentals remain strong and the economy is doing better than it has in several decades.

We believe we’re not close to a recession or bear market but we’re going through a fairly normal market correction driven by geopolitical and Fed related noise.

I hope these observations are helpful.

Wayne Copelin, CFP^®

Copelin Financial Advisors
514 Brooks Street
Sugar Land, TX 77478
Phone: 281 240-2902
Fax: 281 240-2856

Securities offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA & SIPC Advisory Services offered through Harvest Investment Services, LLC., a Registered Investment Advisor Copelin Financial Advisors, Inc and Harvest Investment Services, LLC are independent of ProEquities, Inc