- Global markets slide on interest rate and monetary policy concerns. The S&P 500 is trading near flat after Friday’s sell-off, in which most sectors lost over 2%. Utilities and telecom led the decline, shedding 3.8% and 3.4%, respectively. Investors will be searching for clues to the timing of the next interest rate hikes in speeches from several potentially dovish Federal Reserve Bank (Fed) speakers today. Overnight, foreign equities started the week lower across the board as signs mount that further monetary stimulus may not be readily forthcoming. The Nikkei lost 1.7% and the Shanghai Composite shed 1.9%, while European markets are also lower, paced by a 2.2% decline in Spain’s IBEX. WTI crude oil fell below $45/barrel this morning, COMEX gold is down half a percent to $1328/oz., and the yield on the 10-year Treasury sits at 1.67%, its highest level post-Brexit.
- Remembering 9/11. Let us all remember those who were lost on 9/11 and thank those who sacrifice to keep our country safe. We will never forget.
- Putting Friday’s big down day in perspective. The 2.5% drop for the S&P 500 on Friday was the first 1% move (up or down) in 43 days and the first 1% drop in 51 days. In fact, it was the first time in history that the S&P 500 went from being 0.5% away from a new high one day, to a fresh two-month low the next. It was the largest daily drop since the 3.6% drop due to the Brexit vote and checked in at the third largest drop of the calendar year. Lastly, the selling was so extreme (and didn’t let up) that the S&P 500 closed exactly at the intra-day lows for only the second time this entire calendar year (May 11 was the other day).
- What does a big drop on a Friday mean? The last two times the S&P 500 dropped more than 2% on a Friday saw the next Monday lose 3.9% (in August 2015) and 1.8% (the Monday after Brexit). In other words, some follow-through weakness is possible. Here is the good news: Friday has dropped more than 2% 11 times since the March 2009 lows and the following week has finished green 9 times. Today on the LPL Research blog we will take a closer look at what big drops on a Friday could mean.
- Dividend stocks led the way down on Friday. Leading the market’s decline were the dividend-oriented telecom, utilities, and real estate sectors, with losses between 3 and 4%. As we noted in last week’s Weekly Market Commentary, “Dividend Bubble?” if stocks sell off as interest rates rise on Fed rate hike fears, such as occurred during Friday’s sell-off, the high-yielding sectors may see the biggest declines. Those putting heavy emphasis on dividend stocks for income at the expense of fixed income may want to consider a more balanced approach due to the risk of a potential further increase in interest rates.
- Orderly follow-up to recent down markets. Overseas markets had an orderly decline after Friday’s big U.S. sell-off. Asian shares were down, but generally less than the U.S. market on Friday. The notable exception was Chinese shares that trade in Hong Kong in U.S. dollars and are closely tied to the global economy. Of greater note is that government bonds across the globe have sold off and interest rates have increased. For example, the German government 10-year bond now trades at a (barely) positive interest rate.
- Time to sell? It’s been a good year for stocks—the S&P 500 has returned 5.7% this year despite the drop on Friday. But has it been too good? Seven-and-a-half years into the bull market, valuations are high and we see little upside in stocks between now and year-end. Friday’s more than 1% drop for the S&P 500 was its first such drop since just after the Brexit vote on June 27, so we are due for a pullback. Add to that, September is a seasonally weak month. All of that begs the question, “Is it time to sell?” which we tackle in this week’s Weekly Market Commentary.
- We do not believe high valuations are a reason to sell stocks here. Historical data indicate a weak relationship between the S&P 500 price-to-earnings ratios (PE) and subsequent one-year performance; the correlation is just -0.3. The relationship is much stronger over longer periods of time—high PE ratios have been associated with sub-par returns over subsequent 10-year periods (-0.9 correlation).
- Week ahead. Today, the focus will be on a trio of Fed speakers (Brainard, Lockhart, and Kashkari) ahead of the quiet period before the September 20-21 Federal Open Market Committee (FOMC) Fed policymakers and market participants will have plenty of U.S. data to digest this week, including the September readings on manufacturing in Philadelphia and New York, and August readings on small business sentiment, retail sales, Consumer Price Index (CPI), and industrial production. Overseas, the Bank of England meeting highlights a busy week, which includes the German ZEW index for September and post-Brexit readings on retail sales, industrial production, and employment in the U.K. EU leaders will meet late in the week to discuss Brexit, and China will release August data on property prices, retail sales, fixed asset investment, and industrial production.
- A look at the Beige Book. This week’s Weekly Economic Commentary takes a look at the Fed’s latest Beige Book and what Main Street is saying about the economy, wages, and inflation ahead of the next FOMC meeting.
- Brainhard (Dove)
- China: Industrial Production (Aug)
- China: Retail Sales (Aug)
- NFIB Small Business Optimism Index (Aug)
- Fed Quiet Period Begins
- Germany: ZEW (Sept)
- UK: Jobless Claims (Aug)
- European Commission President Jean Claude Juncker Delivers “State of the Union” Address
- Retail Sales (Aug)
- Philadelphia Fed Mfg. Report (Sept)
- Empire State Mfg. Report (Sept)
- UK: Bank of England Meeting (No Change Expected)
- Household Net Worth/Flow of Funds (Q2)
- EU Leaders Summit Meeting
- Russia: Central Bank Meeting (Rate Cut Expected)