­­Markets posted strong gains last week after struggling for much of October. The S&P 500 had its best weekly performance since May, and the NASDAQ had its first positive week since September.[1] Despite domestic markets dropping on Friday, November 2, the S&P 500 added 2.42%, the Dow increased 2.36%, and the NASDAQ gained 2.65%.[2] International stocks in the MSCI EAFE were also up 3.34%.[3]
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­­Last week did nothing to dispel October’s reputation as a tough month for the markets. The S&P 500 lost 3.94%, the Dow declined 2.97%, and the NASDAQ dropped 3.78% during what was one of 2018’s most volatile weeks so far. All three indexes are down significantly for the month, and both the S&P 500 and Dow have entered negative territory for 2018.[1] International stocks in the MSCI EAFE also struggled, posting a 3.87% drop for the week, and a 13.31% decline for the year.[2] 
Why did stocks drop? Will they continue to do so?
Currently, many topics are on investors’ minds, from inflation to tariffs to valuations and beyond, but analysts are not pointing to one single culprit for last week’s performance. Instead, a mixture of concerns, with a large dose of emotion, seemed to drive the markets.[3]
Emotional reactions are understandable when volatility emerges, but they have no place in long-term investment strategies. Instead, we need to focus on the fundamentals.
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Stock performance was mixed last week as investors considered the impact of interest rates, international affairs and corporate earnings.[1] The S&P 500 gained 0.02%, and the Dow added 0.41% to post its first weekly gains in October. The NASDAQ declined 0.64% and extended its losing streak.[2] International stocks in the MSCI EAFE dropped by 0.08%.[3]
While the final weekly results showed relatively little growth or loss, the week included some volatility.[4] So far, domestic indexes have struggled this month. As of October 19, the S&P 500 and Dow had each lost more than 3% for the month, and the NASDAQ was down 7%.[5]
As we have often discussed in our market updates, volatility may feel uncomfortable, but market fluctuations are normal. That perspective becomes especially relevant in October, which is considered the most volatile month for markets.[6]
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­­Friday, September 28, was the last trading day in 2018’s 3^rd quarter, and the S&P 500 posted its strongest quarterly return in nearly 5 years.[1] The Dow also showed impressive returns by beating expectations for the quarter, while the NASDAQ notched record highs against 2017 numbers. For the quarter, the S&P jumped 7.2%, the Dow increased 9.3%, and the NASDAQ moved up 7.1%.[2]
Weekly numbers, however, revealed mixed performances: the S&P 500 slipped 0.54%, the Dow fell 1.07%, and the NASDAQ gained 0.74%.[3] Internationally, the MSCI EAFE dropped 1.07%.[4]
As we learn more about the 3^rd­ quarter, some details from last week offer perspectives on where we stand today.
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Domestic markets fell last week due to negative trade news and declining tech stocks, with the S&P 500 and Dow both breaking their multi-week winning streaks. Meanwhile, the NASDAQ posted losses for 4 days in a row for the first time since April and experienced its worst September start since 2008.[1] Overall, the S&P 500 lost 1.03%, the Dow dropped 0.19%, and the NASDAQ gave back 2.55% for the week.[2] International stocks in the MSCI EAFE also declined, losing 2.89%.[3]
The Cboe Volatility Index (VIX), which can help gauge market fears, increased 15.8% last week.[4] This increase matches what often occurs during September, when volatility returns after waning during the summer months. In fact, since 2007, volatility has been above average in September.[5]
Of course, the change from one month or season to another isn’t enough to trigger market losses and rising volatility. Let’s analyze what drove these experiences last week.
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Trade continued to dominate the news last week and cause market volatility as investors monitored discussions of the North American Free Trade Agreement (NAFTA) and tension with China. While Mexico and the U.S. reached a new trade deal early in the week, talks with Canada stalled on Friday, August 31. Reports also came out that President Trump may be adding tariffs on another $200 billion in Chinese goods.[1]
Domestic markets increased for the week and ended August in positive territory. The S&P 500 and Dow each had their best August since 2014—while the NASDAQ’s 5.7% growth was its best performance for the month since 2000.[2] On Wednesday, the S&P 500 reached a new record high.[3] For the week, the S&P 500 gained 0.93%, the Dow added 0.68%, and the NASDAQ increased 2.06%.[4] International stocks in the MSCI EAFE joined the growth, adding 0.26%.[5]
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Challenges in emerging markets affected both U.S. and global stock performance last week, with the S&P 500 experiencing several down days.[1] By market close on Friday, however, two of the three major domestics posted gains for the week. The S&P 500 added 0.59%, the Dow increased 1.41%, and the NASDAQ lost 0.29%.[2] Meanwhile, the MSCI EAFE international stocks slipped 1.18%.[3]
As several reports deepened our understanding of the economy’s underlying health, investors balanced the news with updates on Turkey and trade disputes.[4] Here are some key highlights of the various developments:
Economy: Mixed Picture
The latest unemployment data beat expectations, indicating continuing strength as the labor market is near full employment. However, new home construction missed its 7.4% projected growth, increasing only 0.9% in July—following June’s 12.3% decline.[5] Nevertheless, more positive news emerged: Thanks to tax cuts, a solid labor market, and economic growth, retail sales increased 6.4% in July year-over-year. Retail sales have now risen for the past 6 months.[6]
Turkey: Sanctions and a Tumbling Lira
On Monday, August 13, the Turkish lira hit its lowest point ever against the U.S. dollar.[7] The U.S. has threatened more sanctions on Turkey if the country does not release U.S. Pastor Andrew Brunson. In addition, Turkey’s inflation is swelling, and President Recep Tayyip Erdogan may be suppressing the central bank’s ability to increase interest rates.  The lira may continue to decline in value until interest rates rise.8 Some analysts are optimistic that these developments won’t create contagion in other markets. Not only is Turkey’s economy relatively small and investors have priced in some risk, opportunities still exist to help calm Turkey’s challenges.9
Trade Update: Positive Movement
Later in the week, we received positive updates on trade challenges with China and the North American Free Trade Agreement (NAFTA). Mexican economy minister, Ildefonso Guajardo, announced that he hoped to finalize some NAFTA negotiations by this week.10 In addition, officials from the U.S. and China will be meeting in Washington, D.C. this week to discuss the ongoing trade disputes. These talks come before the anticipated meeting in November between President Trump and Chinese Leader Xi. A trade war with China has been one of the market’s largest concerns, so if the tension lessens, that is likely good news for equities.11
Looking Ahead
This week, we’ll receive more information about the housing market that reveals how this key industry is currently performing. We will also continue to track developments in trade and Turkey. As always, if you have any questions about what you read here¾or what you’re hearing elsewhere¾we’re available to talk.
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Stocks ended the week in mixed territory as trouble with Turkey’s currency affected U.S. equity performance on Friday, August 10.[1] For the week, the S&P lost 0.25%, the Dow declined 0.59%, and the NASDAQ increased 0.35%.[2] International stocks in the MSCI EAFE stumbled, giving back 1.57%.[3]
Although last week brought relatively few economic updates, we did learn that the labor market continues to improve and consumer prices are on the rise.[4] While this news may have affected market performance, the challenges facing Turkey’s economy had an outsize impact on global stocks.[5]
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Domestic markets ended last week in positive territory, as the S&P gained 0.76%, the Dow was up 0.05%, and the NASDAQ increased 0.96%.[1] This performance marked the 5^th week in a row that the S&P 500 and Dow posted gains.[2] Meanwhile, international stocks in the MSCI EAFE stumbled, losing 1.47% for the week.[3]
Once again, trade and corporate earnings were in the news last week. We learned that the U.S. is considering increasing tariffs on $200 billion of Chinese imports. In response, China announced their own tariffs ranging from 5%–25% on $60 billion of U.S. products.[4]
Corporate earnings season also continued, and so far, more than 78% of S&P 500 companies have beaten estimates.[5] If the trend holds, the 2^nd quarter will likely average more than 20% growth in earnings per share. Companies have also detailed positive perspectives for the rest of 2018, showing that this strong corporate performance should continue.[6]
Of course, last week’s trade and earnings weren’t the only topics on investors’ minds. We also received a number of data reports that shaped our understanding of the economy’s health.
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On Friday, July 20, stocks lost a small amount of ground after President Trump escalated his threats of increasing tariffs on China. However, strong quarterly earnings reports from several large companies helped provide balance in the markets.[1] For the week, domestic indexes experienced little movement, as the S&P gained 0.02%, the Dow was up 0.15%, and the NASDAQ dropped 0.07%.[2] International stocks in the MSCI EAFE had slightly more change, with a 0.63% gain.[3]
What We Learned Last Week

• Corporate earnings rose in the 2^nd quarter
  As of July 20, 87 S&P 500 companies have released their 2^nd quarter data. Of these companies, 83.9% surpassed analysts’ estimated results. In fact, the earnings season is going well enough that analysts have increased their growth projections. They now expect to see companies average 22% earnings growth over the past year, up from 20.7% growth projections on July 1.[4]
• Retail sales increased
  The most recent retail sales data indicated that consumers feel confident in the economy and labor market.[5] June’s strong growth, coupled with upward revisions to May’s results, support predictions for healthy Gross Domestic Product (GDP) increases in the 2^nd quarter.[6]
• Industrial production hit a new record
  In June, U.S. manufacturing and mining increased. Overall, industrial production had an annual rate that was 6.1% higher in the 2^nd quarter than the 1^st quarter of 2018.[7]
• Housing starts dropped
  The latest housing-start report came in far below estimates. This decline occurred across all U.S. regions as homebuilders shared concerns about materials costs and labor shortages. However, housing start data often fluctuates from month-to-month, and reports show that the 1^st half of 2018 is 7.4% higher than the same time period last year.[8] 

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