Last week’s momentum carried over to this week as equity markets finished the week positive across the board. For the week, the DJIA closed the week at 17897 for a weekly gain of 1.85%. The broader-based S&P500 ended the week at 2081 for a weekly gain of 1.65%. Smaller US companies represented by the Russell 2000 were even better as the index finished up 3.08% for the week. International markets were also strong as both the MSCI EAFE and MSCI EM were up 3.61% and 3.69% respectively. Treasury rates were slightly lower across the board with the 10yr US Treasury closing at a yield of 1.76%.
Earnings season kicked off this past week with only a fraction of S&P500 companies reporting. Results have been relatively positive versus expectations with over 70% of companies reporting earnings ahead of analyst expectations. In global economic news, the IMF (International Monetary Fund) cut its global economic growth outlook to 3.2% (down from 3.4%), largely due to China and weak commodity prices. The revision marks the fourth straight cut in their 2016 forecast but the IMF does think conditions will be begin to normalize next year as they increased their 2017 Global GDP estimate to 3.6%. Domestic economic news for the week was as follows: Retail sales declined 0.3% m/m vs. expectations of 0.1% gain; Import prices increased 0.2% m/m while PPI decreased 0.1% m/m; The consumer sentiment index fell to 89.7.
Be on the lookout for our client quarterly reports along with our 1st quarter newsletter Fed Trumps Market Anxiety. Have a great week.
“What you do today can improve all your tomorrows.” – Ralph Marston
The markets ended a tough week on an up note in response to the Fed’s late-Thursday verbal intervention. Yellen and three former Fed leaders talked up the prospects for the US economy and promised a “reasonable path” for interest-rate increases. Rising oil prices also helped Friday’s market uptick, but the week was still down 1.2% or more, depending on the index. The 10Yr US Treasury closed the week at 1.72%, mostly flat for the week.
The upcoming earnings season is already expected to be dismal, with S&P 500 contracting ~8.5% in the first quarter, the 4th consecutive quarterly decline. Unfortunately, these low expectations do not guarantee that “bad news is good news”. Witness Gap Stores’ late-Thursday warning about lower sales and shrinking profit margins, which produced a 14% stock price decline. Alcoa will initiate actual earnings reports on Monday.
On a lighter note, it is encouraging to see American private-sector risk-taking succeed. Last Friday Elon Musk’s 15 year-old Space X Corp successfully recovered the first stage of its Falcon 9 rocket [from a barge in the Pacific ocean!], which was part of a launch of its Dragon spacecraft to the International Space Station. The ability to recover and reuse rockets is key to achieve space access cost reduction.
“We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.” ― John F. Kennedy
U.S. stocks rose last week following positive economic news and dovish comments from Fed Chairwoman Janet Yellen indicating that the Fed will continue to move ”cautiously” in raising interest rates. The US Labor Department reported that the economy added 215,000 jobs in March – (in-line with expectations) while the unemployment nudged higher to 5% from an eight year low of 4.9%. U.S. manufacturing expanded in March for the first time since last summer … perhaps portending an improvement in U.S. manufacturing as the economy moves past the effects of a strong dollar and low oil prices. Consumer spending rose slightly in March, but January’s number was revised lower causing some economists to revise forecasts for first quarter GDP growth to the 1% area.
For the week, the S&P 500 was up 1.8% while the DJIA increased 1.6% marking the sixth weekly gain for both the S&P 500 and DJIA in the last seven weeks. International equities were positive for the week as the MSCI EAFE ticked up 0.07% while he MSCI EM closed 1.58% higher. Treasury yields moved lower last week as the 10YR Treasury closed at a yield of 1.79%.
First quarter earnings will likely be lackluster as 94 of the 500 S&P companies have already issued guidance which was below previous analysts’ estimates. According to the Wall Street Journal, first quarter earnings estimates for the S&P 500 are expected to decline by 8.5% marking the fourth consecutive quarter of declining earnings. Earnings should start to look better as the year moves on as year-over-year comparisons become more favorable.
“It’s the little details that are vital. Little things make big things happen.” – John Wooden
ND&S Weekly Recap
April 25, 2016
US stocks closed slightly higher last week as the DJIA and the S&P 500 gained 0.62% and 0.53% respectively. Smaller US companies performed even better for the week with the Russell 2000 returning 1.40%, while international developed companies, as evidenced by the EAFE index, were up 1.31%. Yields moved higher across the board as the 10 year US Treasury closed at a yield of 1.89%. Despite OPEC’s inability to agree on a production freeze, oil prices were able to increase over 8% for the week.
First quarter earnings have been better than expected, with 59% of companies beating expected revenues and 82% exceeding earnings expectations. However, earnings reports from large technology companies disappointed investors as the more technology-focused NASDAQ ended the week down 0.66%. Developing technologies like cloud storage, mobile and worldwide internet usage are affecting technology, retail and media sectors.
The returns for other cyclical sectors last week were as follows: energy 5.5%, health care 2.6%, basic materials 2.5%, financials 2% and industrial 1%, all of which performed much better than the more defensive sectors. Utilities were the worst performers, down 3.1% for the week. This sector rotation and with emerging market stocks up 6.9% year-to-date suggests investors are beginning to diversify away from the past momentum winners like the FANG stocks.
Jobless claims declined to their lowest levels since 1973, surprising many economists. The improved employment numbers, could create hawkish comments from the Fed at this Wednesday’s meeting.
“Know what you own, and know why you own it.” – Peter Lynch