Market News – October 29, 2018

U.S. ECONOMY GROWS AT 3.5% RATE IN THIRD QUARTER:  The United States gross domestic product grew in the third quarter at an annual rate of 3.5%.  Consumers led the way as personal consumption expenditures increased by 4.0% (strongest since 2014).

SCARY OCTOBER: October is shaping up to be one of the worst months in the equity markets in eight years.  The primary causes for the pullback seem to be fears that 1) U.S. corporate earnings might be peaking, and 2) Chinese and European economies might be slowing down.  Tech firms, which have been trading at high valuations,  have been hit the hardest.  In February the S&P 500 dropped double digits, and if it goes down another 0.8% next week, it will have gone down another 10% since its most recent highs.  The so-called FANG stocks (Facebook, Amazon, Netflix and Google’s parent company Alphabet), have lost $350 billion in value this month.  About half of S&P 500 companies have reported their third quarter earnings, and 60% have exceeded expectations, but that is obviously not enough right now.

U.S. OR INTERNATIONAL STOCKS?:  International stocks, as seen above, are significantly negative for the year while U.S. stocks are slightly positive.  Are U.S. stocks overvalued compared to international stocks?  One way of valuing the stock of a company is to take its price and divide it by the book value of the company to come up with the Price to Book Ratio.  The Price to Book Ratios of U.S. companies in the S&P 500 are almost 2.2 times the Price to Book Ratio of the international companies in the MSCI All Country Index X US (see above, and see footnote below).  This 2.2x multiple is an all time high.

LEADING ECONOMIC INDICATORS STILL STRONG:  The Conference Board tracks ten economic indices of indicators that historically predict where the economy is headed, and to signal when economic cycles are turning.  The Leading Economic Indicator Index increased again in September as it has been doing since early 2009.  Before the 2001 and 2007 recessions, this index turned south for about a year before the recession  began.

WE CONTINUE TO PAY DOWN DEBT:  From the 1950s until the early 2000s, the percentage of household debt to household total assets gradually and inexorably increased from about 6% to 14%.  Then it jumped to 20% just before the Great Recession began in 2007.  It has done nothing but decrease since then.  It is now back down to about 13%, and continuing to move down.

U.S. HOTELS DOING WELL:  2018 is the fourth strong year in a row for U.S. hotel occupancy.  The occupancy rate for 2018 year-to-date is just ahead of 2017 which was a record year.

REFERENCES:

SCARY OCTOBER:  https://www.wsj.com/articles/global-stocks-resume-declines-1540541081
U.S. ECONOMY GROWS AT 3.5% RATE IN THIRD QUARTER:  https://www.calculatedriskblog.com/2018/10/bea-real-gdp-increased-at-35-annualized.html
U.S. HOTELS DOING WELL: https://www.calculatedriskblog.com/2018/10/hotels-occupancy-rate-increased.html; http://www.hotelnewsnow.com/articles/291109/STR-US-hotel-results-for-week-ending-20-October
U.S. OR INTERNATIONAL STOCKS?:  S&P 500; MSCI All-Country World Index.
LEADING ECONOMIC INDICATORS STILL STRONG: https://www.conference-board.org/data/bcicountry.cfm?cid=1
WE CONTINUE TO PAY DOWN DEBT:  Federal Reserve, scottgrannis.blogspot.com