Markets remained volatile last week with US equity markets ultimately finishing the week in the red. For the week, the DJIA closed lower by 1.51% while the broader-based S&P 500 finished down 1.20%. International markets finished the week in the green with the MSCI EAFE up 0.22% and MSCI EM up 0.52%. Yields ended the week lower with the 10yr US Treasury closing at 2.85%, down from 2.90% the week prior. Short-term treasury yields, however, continue to push higher with the anticipation of additional FOMC hikes in 2018. The FOMC March meeting will conclude Wednesday with another 25bps hike in the Federal Funds rate likely. Oil ended the week at $62.35 a barrel.
On the economic front, CPI/PPI releases showed inflation of 2.2%/2.8% year over year. CPI (Consumer Price Index) is reported from the consumer’s side while PPI (Producer Price Index) comes from the provider of the services or goods. Both reports were roughly in-line with estimates showing a healthy economy. Housing starts came in below expectations in February. Most of this is probably attributed to a lack of supply available from a tight housing market. Permits are up 6.5% from a year ago which should forecast more supply hitting the market in the near-future.
A day doesn’t pass without drama being reported out of Washington. Last week’s headlines were dominated by changes once again in the West Wing. Lawrence Kudlow, former Wall Street economist, was named director of the National Economic Council. He is a long-time free-trade advocate and is likely to be a moderating voice against some of the president’s protective instincts. Also this week, Secretary of State Rex Tillerson was replaced with CIA Director Mike Pompeo. The move caught the attention of many publications because of the manor in which the change was made. The President and his Chief of Staff John Kelly have settled on some type of truce, leaving him in his current position when it looked like he might depart as well. Ultimately, markets will continue to disregard the Washington drama if earnings and the economy continue to chug along.
The year of the upsets – according to the tens of millions of men’s NCAA Tournament brackets submitted online, none survived the opening round. For the first time in history, a 1-seed was upset in the first round with 16thseeded University of Maryland-Baltimore County beating 1st seeded University of Virginia on Friday.
“It’s never an upset if the so-called underdog has all along considered itself the better team.” – Woody Hayes
Stocks pushed nicely higher last week as the Labor Department reported that the economy added 313,000 jobs during the month of February (well ahead of estimates of 200,000). Unemployment remained unchanged at 4.1% for the fifth straight month. The report eased investors’ concerns that inflation was accelerating too quickly as year-over-year wage growth in February was 2.6% (less than January’s rate of 2.9%). Also tempering investors’ concerns was the fact that steel and aluminum tariffs imposed by the government were not as restrictive as originally thought (Canada and Mexico are excluded, for now). The synchronized global recovery continues.
For the week, the DJIA gained 3.34% while the S&P 500 finished higher by 3.59%. Developed international markets also pushed ahead as the MSCI EAFE index closed up 1.88% for the week. Emerging markets added-on 2.18% for the week. Despite the ‘correction’ experienced in early February, the DJIA is up 3.0% for the year-to-date period while the S&P 500 is higher by 4.6% for the same period. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week relatively flat. As a result, the 10 YR US Treasury closed at a yield of 2.90% (up 4 bp from the previous week’s closing yield of 2.86%). Gold prices inched higher by $1.30 to close at $1,322.40/oz. Oil prices were relatively flat last week as oil closed at $62.05/bbl.
The week ahead has a number of economic releases – CPI/PPI, Retail Sales, NY/Philly Fed manufacturing surveys, Import prices, Housing starts, Industrial production and Preliminary Feb. consumer sentiment. Fourth-quarter earnings reports will continue as we expect earnings to be relatively positive versus expectations. Friday could prove to be a volatile day as ‘quadruple witching’ takes place where market index futures contracts, market index options contracts, stock options contracts and stock futures contracts all expire. Quadruple witching typically results in increased volatility. Fortunately this only happens 4 times per year – on the third Friday of March, June, September and December.
As always, we plan to look through the day-to-day news and focus on longer-term objectives. Investors should stay the course and stick close to their long-term asset allocation targets.
Don’t forget to watch March Madness … a nice diversion from the day-to-day noise of the markets and headline news!
“The only difference between a good shot and bad shot is if it goes in or not.” – Charles Barkley
Market volatility continued again last week as Fed Chairman Jerome Powell addressed Congress making his first public comments since taking office. His remarks affirmed his commitment to gradually increasing rates while his optimistic view of the economy raised concerns that the FOMC might increase rates four times in 2018(expectations are for three rate hikes this year). In addition, President Trump’s pledge to impose tariffs on foreign steel and aluminum increased concerns by investors that a trade war could negatively impact global growth. This threat could pressure stocks in the near-term, but we feel the global economic expansion remains intact.
The S&P 500 and the DJIA declined 1.98% and 2.97% respectively. Internationally, the MSCI EAFE index was off 2.86% and emerging markets were down 2.80% as several European countries threatened retaliatory tariffs. Rates on the 10 year U.S. Treasury declined slightly from 2.88% to 2.86%. Oil moved lower for the week closing at $61.24 a barrel.
Economic news for the week was mixed – housing sales in January slowed to 593k missing estimates; durable goods declined 3.7%m/m missing estimates of a 2.0% decline; 4Q GDP was revised down to +2.5% from its preliminary estimate of 2.6%; ISM mfg. PMI which measures the manufacturing environment had a reading of 60.8 surpassing estimates. This week look for reports on Friday on February job growth and wage growth which could strengthen the Fed’s resolve in raising rates.
“No nation was ever ruined by trade.” – Benjamin Franklin
ND&S Weekly Commentary (3/26/18) – Final Four
March 26, 2018
March madness continued last week as US equities fell 6%, their worst week since January 2016. Investors feared the Trump administration’s tariffs would escalate into a global trade war. On Friday, President Trump “reluctantly” signed a $1.3 trillion (yes trillion) spending bill to fund the government through September.
For the week, the S&P 500 fell 6% and the tech-heavy NASDAQ declined 6.5%. Facebook’s issues with handling user data drove its stock price down 14% and Twitter, Apple, and Google were all down over 7%. Healthcare, Financials, and Technology were the sectors that drove most of the declines for the week. Global markets were not immune as President Trump’s $60 billion tariffs on Chinese imports made headline news. The MSCI EM declined over 3% and developed international markets (MSCI EAFE) were down 1.4%.
As expected, the Federal Reserve raised its benchmark federal funds rate 0.25 percentage points to a range of 1.50% to 1.75%. The Fed’s comments and voting were rather hawkish with respect to US economic growth and inflation as they suggested the possibility of (up from two) three rate hikes in 2019. This is likely a reflection of the stronger economic outlook they are forecasting. The 10Yr Treasury closed at a yield of 2.826%, slightly lower than the previous week.
Saudi crown prince Mohammed bin Salman paid a visit to the White House last week. They discussed many things including escalating tensions in the Middle East between itself and Iran. The Kingdom would like to see more collaboration on extending production cuts between OPEC and non-OPEC countries into 2019. Ironically, this comes at a time that state-owned Saudi Aramco is seeking a public listing. Oil (Brent) gained 2.2% to $70.45 a barrel as a result of declining global supply.
The US markets will be closed on Friday in observance of the Good Friday holiday. Consumer confidence will be reported on Tuesday and pending home sales on Wednesday. Also Wednesday, there will be the third and final estimate for 4Q17 GDP (2.7% expected).
Although the market downturn and volatility is unsettling, the US stock market is up 34% over the past two years and has advanced 373% since bull market started (crossing 9 years earlier this month). Our advice is to not get overly emotional especially over headline news and stay the course of global diversification and holding quality assets.
Happy Easter and Passover!
“Do not abandon yourselves to despair. We are the Easter people and hallelujah is our song.”
-Pope John Paul II