The S&P 500 lost 0.9% on Friday, with the pullback suggesting a natural consequence of an overreaction to this week's election spike. The Dow Jones Industrial Average lost 0.8%, the Nasdaq Composite lost 1.7%, and the Russell 2000 lost 1.8%. For the week, the S&P 500 advanced 2.1%.
Outperforming the broader market on Friday were the defensive-oriented consumer staples (+0.5%), real estate (+0.1%), and utilities (+0.1%) sectors. Conversely, FANG stocks within the lagging communication services (-1.5%), consumer discretionary (-1.5%), and information technology (-1.7%) sectors underperformed. Netflix led the FANG group lower with a loss of 4.6%. Apple (AAPL 204.47, -4.02), Amazon (AMZN 1712.43, -42.48), Alphabet (GOOG 1066.15, -16.25), and Facebook (FB 144.96, -2.91) bared losses between 1.5% and 2.4%.
Chip stocks dragged on the lagging tech sector, as key Apple supplier Skyworks Solutions (SWKS 766.66, -6.74) fell 8.1% after it issued below-consensus top and bottom line guidance for its fiscal first quarter. Its guidance has extended a trend within the semiconductor industry that has warned of slowing chip demand. The Philadelphia Semiconductor Index lost 1.9%.
In other corporate news, Walt Disney (DIS 118.00, +2.00, +1.7%) rose after an upbeat earnings report, while General Electric (GE 8.58, -0.52, -5.7%) took a hit after JPMorgan cut its price target on the stock to $6 from $10. In response, the former Dow component responded that it is a "fundamentally strong company with a sound liquidity position," according to a CNBC report.
Demand for Treasuries increased amid the equity setback, pushing yields lower across the curve. The 2-yr yield lost four basis points to 2.93%, and the 10-yr yield lost five basis points to 3.19%. For the week, the 2-yr yield added two basis points, while the 10-yr yield shed two basis points.
Separately, WTI crude, which is the U.S. benchmark for oil, fell 0.9% to settle at $60.16/bbl. Friday's loss has extended its decline to 21.8% from its Oct 3 four-year high. On a related note, the oil-sensitive energy sector lost 0.4% on Friday.
In economic data, the Producer Price Index (Briefing.com consensus +0.2%) for October was released on Friday morning, showing a higher-than-expected increase of 0.6%. The core reading, which excludes the volatile prices of food and energy, also came in above consensus (+0.5% actual vs +0.2% Briefing.com consensus). The headline pressures stoked concerns about pass-through inflation to consumers and, in turn, helped to strengthen the Fed's case for additional rate hikes.
In trade news, White House National Trade Council Director Peter Navarro made some combative comments against CEOs for pushing President Trump to make a trade deal with China and stated a trade deal will be on the president's terms. Separately, President Trump has reportedly been telling associates that he wants to replace Commerce Secretary Wilbur Ross by the end of the year.
Overseas, China reported just a 0.2% rise in its Consumer Price Index on Friday, which was in-line with estimates but significantly below last month's increase of 0.7%. Its softening inflation has continued to fuel concerns over a slowing Chinese economy.
Reviewing Friday's economic data, which included the Producer Price Index for October, the preliminary reading of the University of Michigan Consumer Sentiment Index for November, and the Wholesale Inventories report for September:
- The Producer Price Index for final demand jumped 0.6% in October (Briefing.com consensus +0.2%) while the index for final demand, less food and energy, rose 0.5% (Briefing.com consensus +0.2%). Those increases left the index for final demand up 2.9% year-over-year, versus 2.6% in September, and the index for final demand, less food and energy, up 2.6% year-over-year, versus 2.5% in September.
- The key takeaway from the report is that it will stoke concerns about pass-through inflation to the consumer, which have already been stoked by numerous companies during the third quarter earnings-reporting period talking about higher input costs and increasing prices.
- The preliminary University of Michigan Index of Consumer Sentiment for November held quite steady, edging down to 98.3 (Briefing.com consensus 98.0) from the final reading of 98.6 for October.
- The key takeaway from the report is that stock market sell-off in October had no real impact on consumer sentiment, which was rooted more in favorable views about income expectations and job growth that are key drivers of consumer spending.
- Wholesale inventories increased 0.4% in September (Briefing.com consensus 0.3%) on top of a downwardly revised 0.9% increase (from 1.0%) in August.
- The key takeaway from the report is that sales are increasing year-over-year at a faster rate than inventories, which can be a precursor to improved pricing power for wholesalers.
Looking ahead, investors will not receive any economic data on Monday.
- Nasdaq Composite +7.3% YTD
- Dow Jones Industrial Average +5.1% YTD
- S&P 500 +4.0% YTD
- Russell 2000 +0.9% YTD
Week in Review: Fed Policy Statement Not Enough to Derail U.S. Midterm Gains
The S&P 500 rose 2.1% this week, but had to weather a late week sell-off after the latest policy statement from the Federal Reserve humbled an upbeat reaction to the midterm elections. Neither outcome was a surprise, but they were representative of recent market volatility. The Dow Jones Industrial Average and the Nasdaq Composite also finished the week higher, adding 2.8% and 0.7%, respectively. The Russell 2000 added 0.1%.
The midterm elections produced a split Congress with the Democrats taking control of the House and the Republicans retaining control of the Senate. The prevailing assumption in the market was that a newly divided Congress would preserve market-friendly policies, namely the tax cut and deregulation efforts. In addition, investors took delight in the fact that the stock market has historically done well in years with a Republican president and split Congress.
The Fed released its policy statement on Thursday, in which it decided to leave the fed funds rate unchanged as expected. The central bank noted that it expects further rate hikes that are consistent with sustained economic growth, strong labor market conditions, and inflation near its symmetric 2% target over the medium term, but omitted October's sell-off and U.S.-China trade developments from its policy statement. Those omissions were a clear, between-the-lines message that the FOMC remains poised to raise rates for a fourth time this year in December.
In the stock market, the health care (+4.0%), real estate (+3.6%), and utility (+3.1%) groups led the way. Of note, health care has surpassed the information technology (+1.4%) and consumer discretionary (+2.0%) sectors for the top spot in the yearly sector standings with a 2018 gain of 12.4%. For comparison, tech is up 10.7%, and consumer discretionary is up 10.9%.
Conversely, the communication services sector was the only group to finish in negative territory with a weekly loss of 0.2%.
In earnings, some notable companies that had upbeat reports included Berkshire Hathaway (BRK.B), CVS (CVS), Eli Lilly (LLY), Humana (HUM), and Walt Disney (DIS). On the other hand, Skyworks Solution (SWKS) led chip stocks lower on Friday after it issued below-consensus Q1 earnings and revenue guidance. Skyworks, which is an Apple (AAPL) supplier, warned of slowing chip demand, continuing a disappointing trend out of the semiconductor industry.
On a related note, Japan's Nikkei Asian Review reported that Apple decided to cancel a production increase in its newest low-end iPhone XR. However, the Nikkei also said that demand for the older generation iPhone 8 and iPhone 8 Plus has been higher than expected. Nevertheless, the report corroborated fears over the company reaching peak iPhone sales.
In politics, Attorney General Jeff Sessions resigned his post effective immediately per President Trump's request. Pot stocks initially surged in response to his resignation, as his adamant anti-marijuana stance has been seen as a roadblock to advancing the national discussion for legalization. However, pot stocks pulled back as replacement names currently being floated are against marijuana legalization; acting Attorney General Matthew Whitaker has a mixed record on the issue.
Looking at other markets, U.S. Treasuries had a volatile week, and closed near last week's levels. This week, the 2-yr yield decreased two basis points to 2.91%, and the 10-yr yield added two basis points to 3.21%.
Also of note, WTI crude lost 4.8% this week, entering bear market territory and extending its decline from last month's four-year high. U.S. President Donald Trump granted temporary wavers on Monday to eight countries who import oil from Iran after the U.S.'s energy sanctions on the OPEC member were officially reimposed.