Stocks pulled back this week in somewhat of a mirror image fashion compared to what has been working thus far this year as the laggards led (Energy, Health Care, Financials) while the leaders lagged (Technology, Communication Services, Consumer Discretionary). In our opinion, this pullback is warranted and positive for the long-term health of the market as trees don’t grow to the sky. Consider the fact that, even with this week’s downdraft, the tech heavy NASDAQ Composite has risen more than fifty percent off the early April lows. At this time our expectations are for the pullback will have run its course sometime soon. However, a broadening of the market leaders is probably in the cards and warranted as we enter the new year. A resolution to the government shutdown will be the catalyst to a year-end rally.
- Operating earnings for the prior quarter at Berkshire Hathaway (BRKA/BRKB) surged more than thirty percent, fueled by a more than 200% rise in insurance underwriting income. Perhaps telling about Warren Buffett’s outlook on the economy, prior to share buybacks, cash at the conglomerate rose to a record $381.6 billion. Buffett, 95-years old, will be stepping down as CEO of Berkshire at year end.
- At the Global Financial Leaders’ Investment Summit in Hong Kong, Goldman Sachs CEO David Solomon stated that “it’s likely there’ll be a 10% to 20% drawdown in equity markets sometime in the next 12 to 24 months. Things run, and then they pull back so people can reassess.” The above is not at all surprising as since 1950 there has been a correction of at least percent ever 1½ years or so. As long-term investors, we believe in aligning client portfolios with their long-term objective and care to let the short-term market prognosticating to others.
- As a result of the government shutdown, more than 700 U.S. flights were canceled as of 9 a.m. EST Friday, which according to aviation data firm Cirium, accounts for approximately 3% of the scheduled flights. In a statement, U.S. Transportation Secretary Sean P. Duffy noted that “my department has many responsibilities, but our number one job is safety. This isn’t about politics – it’s about assessing the data and alleviating building risk in the system as controllers continue to work without pay.”
- We spend an entire Sunday afternoon on the couch for eighteen minutes of live action as according to a recent study, that is the average amount of live play for an entire NFL football game which amounts to 8.61% of the three hours and thirty-nine minutes of airtime. What makes matters worse is that we are New York Giant fans! (Source; University of Texas at Austin – Sports Analytics Course, FiveThirtyEight)
It’s The Economy…”
- The University of Michigan reported that its Preliminary November October Reading of Consumer Sentiment fell to 50.3 (-6.2% y/y) from a final October 53.6 as well as from a preliminary October 55.0. The preliminary November expectations component49.0 (-2.6% y/y) from a final October 50.3 and from a preliminary October 51.2. Lastly, the preliminary November current conditions component fell to 52.3 (-10.8% y/y) from a final October 58.6 and from a final September 60.4. According to the Survey of Consumers Director, Joanne Hsu, “consumer sentiment fell back about 6% this November, led by a 17% drop in current personal finances and a 11% decline in year-ahead expected business conditions. With the federal government shutdown dragging on for over a month, consumers are now expressing worries about potential negative consequences for the economy. This month’s decline in sentiment was widespread throughout the population, seen across age, income and political affiliation.” (Source, Univ of Michigan)
- The Institute for Supply Management’s composite index of non-manufacturing (service) sector activity rose to 52.4% during October from 50.0% in September. Of note were New Orders(56.2% v 50.4%), Employment(48.2% v 47.2%), Backlog of Orders (40.8% v 47.3%) and Business Activity (54.3% v. 49.9%). The Prices Paid Component rose to 70.0% during October from 69.4% during September. (Source, Institute for Supply Management)
- The Institute for Supply Management’s composite index of manufacturing sector activity slipped to 48.7 during October compared to 49.1 in September. Generally, a reading above 50% indicates that the manufacturing economy is expanding, below indicates one in contraction. Of note were the changes in New Orders(49.4% v. 48.9%), Production (48.2% v. 51.0%), Supplier Deliveries(inverse, higher number indicates slower delivery times)(54.2% v. 52.6%), Inventories (45.8% v. 47.7%) and Employment(46.0% v. 45.3%). The Prices Paid Component fell to 58.0% during October from 61.9% during September.
Assuming the Government Shutdown Ends, Economic Reports scheduled to be released this week, include the following – on Thursday, October Retail Inflation as Measured by the Consumer Price Index (CPI) and the Weekly Report of Initial Claims for Unemployment Benefits; and, on Friday, October Wholesale Inflation as Measured by the Producer Price Index (PPI), October Retail Sales and September Business Inventories.
Q3 Earnings Season is ramping up. Companies expected to report quarterly earnings this week, to include Cisco Systems (CSCO), Brookfield (BN), Alibaba (BABA), Disney (DIS), Applied Materials (AMAT) and Manulife Financial (MFC).