November 20, 2018

Stocks gapped down quickly at the open, then began to pare losses. The Dow is currently down 385 pts and the SPX is down 1.1%. Industrial, energy and financial sectors are down about 2% in early trading. But all eleven sectors are losing ground. The major stock market indexes are clearly in the process of testing their October 29th lows, and are shaking out the weak hands. European markets fell more than 1% in today’s session and Asian markets were down overnight. China’s Shanghai Composite Index is now down 25% year-to-date in local currency terms. Gold is slightly higher today, although still down 6% year-to-date. WTI crude oil plunged 5% to trade at $54.40/barrel, the lowest since early November 2017. Oil was trading in the mid $70s just six weeks ago. Remember, President Trump tricked the Russians and Saudis into raising oil production levels when he threatened to impose and oil embargo on Iran. He subsequently declined to follow through on that threat and now the world is temporarily oversupplied. Bonds are trading slightly lower today. The 5-year and 10-year Treasury note yields are hovering around 2.87% and 3.06%, respectively.

Target (TGT) reported good third quarter results but the stock is down 9.5% this morning. Revenue came in ahead of analysts’ expectations, but profits were light as the company spent more on digital marketing, same-day delivery, store renovations and employee pay raises. Wall Street analysts really didn’t like the fact that profit margins narrowed. It must be said, however, that most of the news was good. Digital sales shot up 49%, store traffic was up 5% and same-store-sales rose 5.1%. The CEO said the economy is in great shape, and “there is no indicator as we sit here today that the consumer environment is slowing as we enter the holiday season.”

US housing starts—ground-breaking on new construction projects—rose in October to an annualized rate of 1.23 million units. We know the entire housing market has slowed this year as a result of higher mortgage rates and elevated home prices. In the context of a 10 year chart, it’s clear that starts are leveling off. We have likely reached the limit of home price appreciation give the interest rate environment, and housing will likely pause for a while.

Over-use of superlatives and misleading headlines continue to dominate the financial news media’s coverage of this stock market correction. A CNBC reporter wondered this morning whether this is “an historic buying opportunity” or a “red flag for your money.” This is neither. How could it be historic if the stock market isn’t even back to the lows seen in February’s correction? And how could it be a real red flag for a bear market/recession if the economy is so strong? No, this is a false set of options. The truth is that the current situation isn’t worthy of superlatives.


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