Monthly Market Review: Is the Worst Behind Us?


October was a turbulent month as the market faced major headwinds that brought down all three major indices for a second time this year. The S&P 500 fell close to 10% correction territory at -9.25% before closing the month at -7.23%. Though some components of the Dow Jones Index such as 3M Company and Caterpillar reported disappointing earnings and gave gloomy guidance, the overall index held up much better than its peers. Strength of the rest of the components such as Unitedhealth Group, McDonald’s, Boeing, and Apple neutralized the weakness. It was down -8.23% before recovering to close the month as -5.77%. The worst performing index was NASDAQ 100 as it crossed below the 10% correction territory at -12.28% before recovering and finishing the month at -8.78%.

We think that the China trade war rhetoric from the Vice President Mike Pence, rising yields, suspected peak earnings growth and profit taking kicked off the initial sell-offs with disappointing earnings report by major technology companies exacerbating it further.

From a macro perspective, the United States posted strong economic report with third quarter initial GDP reading coming in at 3.5% driven by consumption. The unemployment rate hit 49-year low of 3.7% and the monthly YoY wage growth came in nine year high at 3.1% as the labor market continues to tighten. As the economy marches ahead with all 12 cylinders, this raises the fear of an overheated economy and its implication on the federal reserve monetary policy. The fed announced three rate hikes so far this year and if the economic indicator continues to print strong numbers, we could potential get another rate hike announcement during December meeting because of inflation fears. Currently, the CME Fed Funds Future is pricing in a 76.6% probability of a 25-bps rate hike during the December meeting which will raise the federal funds rate range to 2.25% to 2.50%.

Oil prices dropped significantly over the month. The United States WTI benchmark fell 13.27% and the international benchmark Brent, fell 11.19% from an $86 per barrel high at the beginning of the month to a 7-month low of around $75 at the month’s end. This drop was primarily due to U.S. stockpiles increasing for the 6th week straight given the expectation for an inventory drawdown because of falling Iranian crude oil export due to reinstatement of sanctions.

Average Hourly Earnings YoY Change

Average Hourly Earnings YoY Change

Earnings Season Spotlight by Sectors:

Energy: -12.54%

ExxonMobil (XOM) saw its stock price jump after posting its highest Q3 profits in four years, and seeing revues rise 57%. Chevron (CVX) also saw its stock rally after posting positive quarterly results, including setting a new daily barrel production record of about 2.9 barrels, and nearly doubling its production in the Permian Basin.

Healthcare: -7.24%

UnitedHealth Group, one of the largest healthcare providers in the U.S., posted impressive earnings with EPS beating by 3.91% and revenue exceeding consensus expectations by 12%. The Group also raised guidance for Q4 2018, citing synergies in Optium as a primary reason. Despite the positive earnings, the stock dropped down 4.12%, reflecting the cautious attitude currently surrounding the markets.

Johnson and Johnson (JNJ), the largest drug manufacturer in the S&P 500 reported its EPS beating expectations by 0.02, and revenue growth of 3.5%. The company cited robust a pharmaceutical growth of 6.7%, which was slightly offset by the floundering medical device segment shrinking 0.2%.

Industrials: -11.64%

Boeing reported strong EPS and revenue growth which came in above consensus and raised guidance for Q4. Boeing showed 12% growth in its Global Services, and Space & Security segments making up for declining commercial aircraft sales. Boeing’s performance indicated that tariffs have not impacted all manufacturers. This was further supported by the fact that “tariff” was never mentioned during its earnings call.

3M told a very different story with Q3 EPS missing estimates by 4.65%, revenue shrinking by 0.2%, and guidance being lowered for the future. Reportedly, the implementation of tariffs reduced earnings by 15 cents per share, and 3M management stated future product pricing will offset the higher material costs. Despite tariff impacts, 3M’s main setback was the headwinds from currency volatility, which resulted in a 1.7% reduction in revenue.

Communication Services: -8.44%

Facebook report beat EPS by 19.10% but missed on revenue growth. The metrics currently catching investors’ eyes are revenue growth (the slowest to date) and daily/monthly active users (currently stalling). Some see slowing revenue and user growth as an indication of the company reaching maturity which could signal rough roads ahead for the social media giant.

Alphabet, the parent company of Google (GOOG), beat EPS by 25.5%, however like many other companies this earnings season, it fell short on revenue growth. Alphabet cited growing traffic in total searches, Youtube engagement, and cloud services. GOOG reported large growth internationally as well as domestically. U.S. revenues were up 20% year-over-year, EMEA up 20% year-over-year, APAC up 29% versus last year and Other Americas were up 19% year-over-year.

Financials/Real Estate: -5.09%

Blackrock (BLK), the world’s largest asset manager, beat EPS estimates by 10.10%, however missed revenues by $60mm. In Q3 the asset manager posted its first net capital outflow since 2015, announcing a $3.14bn exodus, compared to last quarter’s inflow of $20bn. The vast majority of this outflow was corporate and not individual investors, signaling that companies are reconsidering their cash investments as a rising interest rate environment seemingly approaches. BLK declined 30% from its highs earlier this year.

By Baruch IMG’s Portfolio Management Team