October lived up to its reputation for volatility as the S&P 500 experienced its second correction of the year, leaving Wall Street wondering if these are the early signs of a peaking business cycle. The reasons for the pullback are numerous: moderating corporate earnings, the potential impact of higher interest rates, a softening housing market, and the ever-present threat of tariffs.
On the plus side, domestic economic data reported in October ranged from middling to excellent and consumer spending / confidence indicators rose for the month. Also, as of this writing the market has regained nearly half of its recent pull back, keeping us positive on the S&P 500 year-to-date. (1)
One of the few weak spots of economic data was within the real estate sector, which sometimes is an early indicator of a weakening business cycle; specifically when home sales and groundbreaking begin to taper off. The jury is out as to whether this is currently happening or if the housing market is simply seeing a temporary slump after years of rising home prices. (2-4)
The National Association of Realtors announced a 3.4% retreat for resales in September, and projected a 1.6% decline in existing home sales for all of 2018. A Census Bureau report showed the rate of new home buying weakened 5.5% in the first three quarters of this year. As for residential construction activity, further Census Bureau data had housing starts down 5.3% for September. Among the possible contributors for a slowing real estate market were rising interest rates, where we saw the 30-year fixed rate mortgage rise from 4.72% to 4.86%. (2-5)
If the pattern that we’ve seen thus far continues until the end of this year, 2018 will be best-known for its large trading ranging and sideways movement. Since the beginning of the year, we have seen prolonged rallies to the upside, followed by sudden corrections to the downside. All-in-all, we’ve been everywhere - and yet nowhere. We are currently not in a “bull” or “bear” market, but rather the less commonly used term “dear” market.
The market is symptomatic of being pulled in different directions by different forces. On one hand, the bears point out tariffs, mid-term elections, and rising interest rates which may keep the market down. On the other hand, bulls praise economic data which shows little sign of weakening, strong corporate earnings, and benefits from personal and corporate tax cuts which still may not be priced into the market.
Fortunately, we are in the midst of the fourth quarter, which has historically has seen the largest gains of the year. October held up to its statistic as being the most volatile, and now we will see if November and December live up to their end of the deal. As always, we are continually keeping a pulse on economic and market conditions as they develop.
Monthly Financial Tip:
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1 - cnbc.com/2018/10/29/stock-market-dow-futures-seen-lower-amid-earnings-season-worries.html [10/29/18]
2 - marketwatch.com/story/existing-home-sales-slump-to-a-near-3-year-low-as-buyers-back-out-2018-10-19 [10/19/18]
3 - freddiemac.com/pmms/archive.html [10/29/18]
4 - cnbc.com/2018/10/30/home-price-gains-fall-below-6percent-for-the-first-time-in-a-year-august-sp-case-shiller-indices.html [10/30/18]
5 - investing.com/economic-calendar/ [10/31/18]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.