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2018 Oct Recap

Interest rates have been trending up as the Federal Reserve Board (Fed) continues its gradual rate hike policy. On September 26, the Fed raised the rate 0.25% to a range of 2.0 - 2.25% – the third hike this year and the eighth since December 2015. The Fed indicated that there may be one more small rate hike in December followed by up to three more in 2019.

Rates on 10-year U.S. Treasuries have climbed from 2.41% at the end of 2017 to 3.05% at the September close. Rates on two-year Treasury Notes have climbed from 1.93% at the end of 2017 to 2.82% at the September close.

Mortgage rates have also been on the rise. In the last week of September, the 30-year fixed-rate mortgage rate rose to 4.72% – the highest rate since April 2011, according to the Federal Home Loan Mortgage Corporation (Freddie Mac). In its September 27 release, Freddie Mac attributed the new high to “a robust economy, rising Treasury yields and the anticipation of more short-term rate hikes.”

So far, however, the rising mortgage rates have had little effect on the housing market. “With inventory constraints and home prices starting to ease, purchase applications have now trended higher on an annual basis for six straight weeks,” according to Freddie Mac. “Consumer confidence is at an 18-year high, and job gains are holding steady. These two factors should keep demand up in coming months, but at the same time, home shoppers will likely deal with even higher mortgage rates.”

Meanwhile, a strong earnings season has helped buoy equities, as the S&P 500 inched up 0.43% for the month and 7.20% for the 3rd quarter. (See: Can Strong Earnings Growth Trend Continue?)

Here are some other highlights from the past month covered in more detail later in this report:

  • Retail sales inch up. Retail sales edged up 0.1% in August, marking the fourth straight month of rising sales, according to the U.S. Department of Commerce.
  • Job growth continues. Employers added 201,000 in August, and the unemployment rate was unchanged at 3.9 percent, according to the U.S. Bureau of Labor Statistics.
  • Oil prices increase. Oil prices climbed back over $70 a barrel in September, ending the month at $73.25 per barrel of West Texas Intermediate (a grade of crude oil used as a benchmark in oil pricing).
  • Gold in slump. Gold continues to slump, as prices have fallen more than 8% since the start of 2018.
  • International stocks reverse slide. International stocks have been in negative territory in 2018, but the MSCI EAFE Index managed a small gain in September. (The MSCI EAFE tracks performance of developed-economy stocks in Europe, Australasia and the Far East.)
In a Nutshell Chart

What’s ahead for the economy and the markets?  See: Can Strong Earnings Growth Trend Continue? by Darren Bagwell, CFA, Chief Equity Strategist.

Drilling Down

U.S. Stocks Edge Up

The S&P 500 ticked up 0.43% in September to finish the month at 2,913.98 – up from 2,901.52 at the August close. For the year, the S&P 500 is up 8.99%, and for the 3rd quarter it was up 7.20%.  (The S&P 500 Index is a market-cap-weighted index that represents the average performance of a group of 500 large-capitalization stocks.)

The total return of the index (including dividends) was 0.57% in September. Through the first three quarters of 2018, the total return of the S&P 500 was 10.56%.

The NASDAQ Index was up 7.14% in the 3rd quarter, and it was up 16.56% through the first three quarters of 2018. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

S&P 500 Index

Retail Sales Edge Up

Retail sales increased by 0.1% in August from the previous month, but sales are up 6.6% from a year ago, according to the advance monthly retail sales report issued September 15 by the U.S. Department of Commerce.

Auto sales were down 0.8% for the month, but they are up 4.0% from a year earlier. Gasoline sales continued to increase on rising prices – up 1.7% for the month and 20.3% year over year. Food services and drinking places were up just 0.2% for the month but 10.1% year over year.

Jobs Still Climbing

U.S. employers added 201,000 in August, and the unemployment rate was unchanged at 3.9%, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued September 7. The economy has added jobs for 95 consecutive months.

Average hourly earnings for all employees on private nonfarm payrolls rose by 10 cents in August to $27.16. Year over year, average hourly earnings have increased by $0.77, or 2.9%.

Manufacturing Expansion Continues

Economic activity in the manufacturing sector continued to expand in September, as the overall economy grew for the 113th consecutive month, according to the Institute for Supply Management (ISM) Report on Business issued October 1.

Fifteen of the 18 industries surveyed by the ISM reported growth in new orders in September, led by textile mills; miscellaneous manufacturing; plastics and rubber products; and computer and electronic products.

Realignment Shakes up Sectors

The S&P 500 Telecommunications sector has been renamed the “Communications Services” sector and broadened to include several prominent media and content companies, effective after the market close on September 28. The realignment in the Global Industry Classification Standard (GICS) {a standardized classification system for equities developed by Morgan Stanley Capital International (MSCI) and Standard & Poor's}, is intended to better reflect the current communications and information delivery landscape.

The newly renamed sector includes all of the previous Telecommunications sector companies, such as AT&T and Verizon, and draws heavily from both the Information Technology and the Consumer Discretionary sectors. Among the leading Information Technology companies moving to Communications Services are Facebook, Alphabet (parent of Google) and Twitter.

Leading Consumer Discretionary companies moving to Communications Services include Netflix, Walt Disney and Comcast. Apple will stay in Information Technology, and Amazon will remain in Consumer Discretionary. The former Telecommunications sector made up about 2% of the S&P 500 total capitalization, while the beefed-up Communications Services sector accounts for about 10%.

Sector Realignment - Leaing Components of New Communications Services Sector

The chart below shows the results of the 11 sectors for the past month, 3rd quarter, and year-to-date, based on the make-up of the sectors through the September 28 close (prior to the sector realignment):

S&P 500 Sectors

Treasury Yields Climb

The yield on 10-year U.S. Treasuries moved up in September from 2.85% at the end of August to 3.05% at the September close. It is up 0.64% this year, after ending 2017 at 2.41%.

The Federal Reserve Board, as expected, approved a small rate hike of 0.25% at its September meeting, raising the rate to a target of 2.00% to 2.25%.

U.S. Treasury 10-Year Bond Yields

Corporate Earnings Climbing

Corporate earnings growth has been stellar this year, thanks, in part, to a significant corporate tax reduction. (See: Can Strong Earnings Growth Trend Continue?)

Forward 12 months earnings per aggregate share have climbed 18.0% for the S&P 500 through the first three quarters of 2018.

S&P 500 Index - Forward 12 Month Earnings Per Aggregate Share

With earnings on the rise, the forward price-earnings ratio (P/E) of the S&P 500 has edged down this year. It closed 2017 at 18.2 – the highest level since 2004 – and dropped to 16.8 at the September close.

S&P 500 - Price/Earnings Ratio

The forward 12 months earnings yield for the S&P 500, which is the inverse of the P/E, ended the 3rd quarter at 5.97% after ending the 2ndquarter at 6.21%. It remains well above the 5.47% yield at the end of 2017. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The equity earnings yield is still significantly higher than the 3.05% market rate of 10-year U.S. Treasuries.

S&P 500 Index - Earning Yield

Dollar Strengthens versus the Euro and Yen

The U.S. dollar has strengthened versus both the Euro and the Yen through the first three quarters of 2018.

The Euro slipped slightly versus the dollar in September, down 0.17%. Through the first three quarters of 2018, the Euro has dropped 3.27% versus the dollar.

Euro/U.S. Dollar Exchange Rate

The dollar had a strong move versus the Yen in September, gaining 2.43%. For the year, the dollar is up 0.87% versus the Yen.

U.S. Dollar/Japanese Yen Exchange Rate

Oil Prices Rebound

Oil prices jumped 4.94% in September, as the price of West Texas Intermediate climbed from $69.80 per barrel at the August close to $73.25 at the end of September. (West Texas Intermediate is a grade of crude oil used as a benchmark in oil pricing.)

For the quarter, the price declined 1.21%, but for the year, oil is up 21.23% after ending 2017 at $60.42 per barrel.

Oil Price - West Texas Intermediate

Gold Declines

Gold prices declined sharply during the 3rd quarter, from $1,254.50 per ounce at the end of June to $1,196.20 at the close of September – a 4.65% drop. For the year, the price of gold is down 8.64% from its price of $1,309.30 at the close of 2017.

Price of Gold

International Equities Make Slight Gain

The MSCI EAFE Index made a slight recovery in September, reversing a negative trend throughout much of 2018.  The index, which tracks the performance of developed-economy stocks in Europe, Australasia and the Far East, was up 0.59% in September, but remains down 3.76% through the first three quarters of 2018.

MSCI EAFE Index

What’s ahead for the economy and the markets? See: 4th Quarter Market Outlook: Can Strong Earnings Growth Trend Continue?

To see our Market Recaps every month and learn more about our perspective on the markets, subscribe to our Investing Insights newsletter.

Media contact: Samantha Mehrotra, 612-844-4197; samantha.mehrotra@thrivent.com

 

All information and representations herein are as of October 1, 2018, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product.  Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Indexes are unmanaged and do not reflect the fees and expenses associated with active management. Investments cannot be made directly into an index.

Past performance is not necessarily indicative of future results.

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