Monthly Economic Update
Presented by Gerald Quigley, October 2018
THE MONTH IN BRIEF
Wall Street maintained its optimism in September. While trade worries were top of mind for economists and investors overseas, bulls largely shrugged at the prospect of tariffs and the probability of another interest rate hike. The S&P 500 rose 0.43% for the month. On the whole, U.S. economic indicators were quite good, and some offered pleasant surprises.1
DOMESTIC ECONOMIC HEALTH
As many analysts expected, the Federal Reserve raised the main interest rate by 0.25% on September 26 to a target range of 2.00-2.25%. The word “accommodative” was absent from its latest policy statement, distinctly hinting at a shift in U.S. monetary policy. As September ended, the CME Group’s FedWatch Tool had the odds of a quarter-point December rate hike at 76.5%.2,3
On the last day of September, Canada joined the U.S. and Mexico in a new proposed trade pact representing an evolution of the existing North American Free Trade Agreement (NAFTA). The new accord, if approved by the governments of Canada, Mexico, and the U.S., would toughen intellectual property and trade secret regulations, require 75% of autos made in North America to use parts from North American manufacturers, stipulate new labor requirements for Mexican industry, and seek to crack down further on unsanctioned fish, animal, and timber imports.4
New data showed hiring bouncing back in August. The Department of Labor stated that the economy added 201,000 net new jobs in that month. Annualized wage growth reached 2.9%, the best number seen since the end of the Great Recession in 2009. The main jobless rate remained low at 3.9%; the underemployment (U-6) rate ticked down to 7.4%, a 17-year low.5
While wages grew 2.8% in the year ending in August, the Consumer Price Index rose only 2.7% in those 12 months. July’s CPI showed yearly inflation at 2.9%. Yearly core consumer inflation also declined 0.2% to 2.2% in the August CPI.5,6
Consumers saved some of what they earned in August. Personal income and personal spending were both up 0.3% for the month; retail sales, though, only advanced 0.1%; 0.2%, with automotive and gas purchases factored out.6
Households viewed the present and near future of the economy with considerable optimism. The Conference Board’s consumer confidence index came in at a remarkable 138.4 last month, up another 3.7 points. The University of Michigan’s barometer rose 4.6 points to 100.8 in its initial September edition, then leveled off to a final September mark of 100.1.6
Off Main Street, durable goods orders advanced 4.5% in August, more than reversing a 1.2% July decline. Industrial production rose 0.4%; factory output, 0.2%. Producer prices retreated 0.1% in August, sharply reducing their annualized gain from 3.3% to 2.8%. The Institute for Supply Management’s purchasing manager indices, gauges of business activity in the manufacturing and non-manufacturing sectors of the economy, looked good in August. The factory PMI climbed to a stellar 61.3 from its 58.1 July level, and the service sector PMI rose to 58.5 from the prior reading of 55.7.6,7
GLOBAL ECONOMIC HEALTH
Economists, investors, and journalists in Asia-Pacific nations were anxious about what U.S. tariffs and continued Federal Reserve interest rate hikes might mean for the region’s economies. The Institute of International Finance said last month that foreign investment dollars flowing into emerging markets had shrunk alarmingly in mid-summer, from $13.7 billion in July to $2.2 billion in August. India’s rupee was down 12% against the dollar YTD in September; Indonesia’s rupiah, 9.2%. On the bright side, India’s annualized GDP was at 8.2% through the second quarter. In its latest forecast, the Asia Development Bank projects 5.8% growth for the Asia-Pacific region in 2019. If that holds true, that would be an 18-year low. The ADB projects China’s GDP to decline from 6.6% this year to 6.3% next year.8,9
Unlike the Fed, the European Central Bank left interest rates alone in September: its deposit rate remained -0.4%, and its main refinancing rate stayed at 0.0%. On September 13, the ECB announced it would keep interest rates at those levels through at least summer 2019 and end its asset-purchase program in December. The European Union had to deal with yet another economic drama last month as the populist government of Italy replaced a plan that would have reduced its budget deficit to 0.8% of GDP with one that would introduce a basic income, boost pensions, and generate a deficit of 2.4% of GDP for the next three years. While the tactic could help a strained Italian banking system, it could also make it tougher for Italy to service its national debt, which is now expanding 30% faster than its economy is growing.10,11
Benchmark performance varied widely in September. The biggest gain came in Argentina, where the Merval soared 33.67% (it ended the month up 30.73% year-over-year). Russia’s Micex rose 6.87%; the Nikkei 225, 5.73%; Brazil’s Bovespa, 2.41%. South Korea’s Kospi added 1.73%; the Shanghai Composite, 1.56%; Taiwan’s TSE 50, 1.08%. Less consequential gains came for the MSCI World (0.39%) and France’s CAC 40 (0.15%).12,13
There were significant retreats last month as well. In India, the Nifty 50 fell 6.88%; the Sensex, 6.86%. No other major index suffered a loss that large, but in Europe, Spain’s IBEX 35 slipped 2.26%; Germany’s DAX, 2.24%. Hong Kong’s Hang Seng lost 1.99% on the month. To our north, the TSX Composite gave back 1.73%. The United Kingdom’s FTSE 100 lost 1.40%; Australia’s All Ordinaries, 1.37%; Mexico’s Bolsa, 1.04%. MSCI’s Emerging Markets index declined 0.76%.12,13
Three important commodities gained 5% or more in September. Copper futures advanced 5.47%, WTI crude gained 5.27%, and heating oil added 5.00%. Oil wrapped up the month at $73.56 on the NYMEX. Other gainers included coffee, +4.43%; platinum, +4.01%; natural gas, +2.74%; silver, +1.80%; soybeans, +1.38%; corn, +1.28%. An ounce of silver was worth $14.69 on the COMEX at the September 28 close.14
Other commodities made September descents: gold, -0.82%; wheat, -1.64%; unleaded gasoline, -1.73%; sugar, -5.19%; cotton, -5.58%; cocoa, -11.06%. COMEX gold was worth $1,196.20 an ounce on September 28. The U.S. Dollar Index was basically flat for the month, declining 0.16% to 94.99.14,15
Existing home sales did not retreat in August; they did not advance, either. The National Association of Realtors pronounced them unchanged in the eighth month of the year, as its pending home sales index slipped 1.8%. New home buying improved 3.5% in August, according to the Census Bureau; that was a nice switch from the (revised) 1.6% decline in July.6
While residential construction activity picked up in August, another indicator hinted that the expectations of home sellers were being recalibrated. The Census Bureau said that groundbreaking increased 9.2% in August (though the number of building permits issued decreased 5.7%). All the same, September brought the release of the July edition of the 20-city S&P CoreLogic Case-Shiller home price index, which displayed an annual appreciation of just 5.9% – quite a drop from 6.4% just a month before. Mortgage rates jumped: between August 30 and September 27, Freddie Mac’s Primary Mortgage Market Survey measured the average interest rate for the 30-year FRM moving north from 4.52% to 4.72%. Mean interest rates for the 15-year FRM rose from 3.97% to 4.16% in that span, while the average interest on a 5/1-year ARM went from 3.85% to 3.97%.6,16
T I P O F T H E M O N T H
Life insurance proceeds normally pass to beneficiaries without being taxed. There is one notable exception: if a policy is transferred between business owners to fund a buy-sell agreement, its tax-exempt status may be lost.
LOOKING BACK… LOOKING FORWARD
Two of the key Wall Street indices rose in September, while two others fell. The Dow Jones Industrial Average and S&P 500 respectively gained 1.90% and 0.43% last month; the Nasdaq Composite and Russell 2000 respectively lost 0.78% and 2.62%. These September ups and downs aside, the big three had an exceptional third quarter. Across Q3, the S&P improved 7.20%; the Dow, 9.01%; the Nasdaq, 7.14%. (The Russell rose 3.26%.) When the month ended, the four indices settled as follows: DJIA, 26,458.31; SPX, 2,913.98; COMP, 8,046.35; RUT, 1,695.10. Finally, the CBOE VIX declined 1.94% last month to a September 28 close of 12.61.1,17
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
Through the years, October has tended to be one of the more turbulent months for equities. The historic standard deviation for the Dow Industrials in October is 1.44%, as opposed to 1.05% for the other eleven months. Yes, two of the most unsettling drops in Wall Street history happened in Octobers – but even with Black Monday and the 1,000-point slides of late 2008 factored out of calculations, volatility in the tenth month of the year remains historically above average. (Only one bear market out of the past 35 has begun in October, in case you are wondering.) This October may break the pattern and be remarkably placid; the past can be a faulty tool indeed for predicting the future. Whether stocks rollercoaster or not this month, investors may want to scale back bullish expectations. Wall Street looks forward to the fourth quarter, year after year, but the trajectory of any gains in Q4 might be flatter than some investors anticipate, since stocks advanced so much in Q3. Still, bullish sentiment is hardly flagging, and the oncoming earnings season could spark a fall rally.21
Q U O T E O F T H E M O N T H
“The end result of kindness is that it draws people to you.”
What will investors pay attention to as the rest of October unfolds? The September Challenger job-cut report and August factory orders (10/4), the Department of Labor’s latest employment report (10/5), September’s Producer Price Index (10/11), September’s Consumer Price Index (10/12), the University of Michigan’s preliminary October consumer sentiment index (10/13), September retail sales (10/15), September industrial output (10/16), September residential construction activity (10/17), the Conference Board’s latest leading indicators index (10/18), the NAR’s newest existing home sales snapshot (10/19), September new home sales (10/24), the NAR’s latest pending home sales index and September durable
goods orders (10/25), the initial estimate of Q3 GDP from the Bureau of Economic Analysis and the final University of Michigan consumer sentiment index for October (10/26), September personal spending and the September PCE price index (10/29), a new consumer confidence index from the Conference Board (10/30), and the October ADP payrolls report (10/31).
T H E M O N T H L Y R I D D L E
A thief steals $100 from a cash register at a store. An hour later, he returns with the same $100 and buys $70 worth of goods, receiving $30 back in change. How much does the store ultimately lose to the thief?
LAST MONTH’S RIDDLE: Two parents have four girls, and each girl has one brother. Given this, how many people are in this family?
ANSWER: Seven people: two parents, four sisters, and one brother.
Gerald Quigley may be reached at 973-257-7227, or at Gerry@GTQfinancials.com
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All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). 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The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The DAX 30 is a Blue-Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). 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1 – markets.wsj.com/us [9/28/18]
6 – investing.com/economic-
13 – msci.com/end-of-day-data-
14 – money.cnn.com/data/commodities [9/28/18]
15 – marketwatch.com/investing/
16 – freddiemac.com/pmms/archive.
17 – quotes.wsj.com/index/SPX [9/29/18]