Volatility in equities is this week's drama
Another turbulent week was fueled by disappointing tech stocks, political uncertainty and housing data that fell far short of expectations.
Both the Dow and NASDAQ hit extremes, with the Dow erasing its 2018 gains in a single day and the NASDAQ having its worst day since 2011. The S&P also continues to slug through October, falling more than 9 percent in less than a month including two six-day losing streaks.
A few things are causing the disruptions: the inevitable rate hike coming from the Fed, international political issues including tariff wars with China and the midterm election coming Nov. 6.
The 10-year treasury yield has settled down a bit after hitting a seven-year high just a few weeks ago at 3.25 percent. The current yield on the 10-year Treasury note sits around 3.09 percent, which is still much higher than the 1 year low of 2.315 percent (see chart). Although there has been a slight flight to quality to bonds expect the trend of higher rates to continue into 2019.
Housing continues to slide
To put it simply, the housing market is getting ugly. The Census Bureau reported that new home sales were down by 5.5 percent (553,000 units seasonally adjusted) in September, which is nearly 4 percent worse than what was predicted by economists (620,000 units seasonally adjusted). The low is only compounded by negative revisions for June and July making September the fourth straight month with a decline in new home sales.
The Federal Housing Finance Agency dealt its own blow to the real estate market this week by releasing data showing home prices rose by 0.3 percent in August and are up 6.1 percent from August 2017.
One positive was the better-than-expected pending home sales which rose 0.5 percent in September. Goldman-Sachs analysts were expecting a flat reading.
GDP increase bolstered by consumer spending
Gross Domestic Product expanded by 3.5 percent annual rate, a little higher than expected, as consumer spending boomed. At its highest level since 2014, consumer spending grew by 4 percent in the third quarter. However, a downturn in exports cause a decrease in real GDP growth. An important note was the less-than-expected growth in the PCE index, a key marker of inflation, rising by just 1.6 percent instead of a predicted 2.2 percent.
The numbers all add up to the 10th straight year of economic growth, and analysts believe there is no logical reason for this expansion to end any time soon.
