Economic and Stock Market Commentary for the week of November 6, 2018

Alex Ralicki |

The often turbulent month of October has come and gone, and once again, it lived up to its reputation. True, the selloffs were not historic, in the mold of those suffered in 1987 and 2008. And there were intermittent rallies, some quite impressive. Still, there was considerable pain inflicted, as the indexes fell sharply during the 31-day span. In fact, several composites descended into correction territory (i.e., a peak-to-trough drop of more than 10%). In all, the gains made by the equity market for the first nine months of 2018 were largely erased.

The selloff appears to have had several causes. To begin with, there were unsettling budget issues with Italy and the European Union and escalating tensions between Saudi Arabia and Turkey. There additionally were high-profile trade disputes with China, uneasiness about Federal Reserve interest-rate policy, and wariness about earnings in the tech sector. Finally, there was the perception that the strong equity rally earlier in the year was overdone, although P/E ratios, which have come down, now seem reasonable, given the supportive earnings.

Meanwhile, the economic fundamentals remain sound, with third-quarter GDP showing a gain of 3.5%. That positive result was highlighted by a healthy rise in consumer spending. To be sure, growth did trail the April-to-June surge of 4.2%, as exports and residential construction lagged. But it was a better result than forecast and should be followed by an increase of as much as 3.0% in the final stanza. Such an outcome likely would encourage the Federal Reserve to raise interest rates again later this year and in 2019.

Earnings also are strong, in the main. True, the few outliers have grabbed the headlines and contributed mightily to the market’s October slide. Yet, they have done little to dent the overall stellar showing for the third quarter. A decent final period would seem likely, as well.

So, the bulls should hold fast, and gradually retake the reins, with the help of lower P/E ratios and modestly higher dividend yields. On balance, the stock market outlook remains fairly positive.

Conclusion: As such, we would retain a fairly heavy weighting in quality stocks.