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17 March, 2018 Market Commentary

Market Commentary - Week 11, 2018


Market Commentary - Week Ending 3/17/2018

Summary

  • Inflation fears recede with multiple economic reports showing moderation
  • Retail sales disappoint for a third consecutive month helping bond prices
  • Technology stocks continue to lead the market in 2018

Market Performance Summary

Source: S&P Compustat, www.yahoo.com/finance for Commodities

Notable Market Headlines

Stocks around the world declined for the week with large U.S. stocks leading the way. Every day of the week was marked by some optimism in the morning that was followed by declining prices throughout the day and ending every day lower than they opened. For the week large U.S. stocks were off -1.7% while small U.S. stocks held up much better declining just -0.7%. Year-to-date small stocks hold a lead over large stocks with gains of +3.5% for small stocks and +2.8% for large.

The largest technology stocks continue to be the best performers in 2018 in spite of some fear that these stocks had overheated in 2017 and early 2018. Year-to-date technology stocks are higher by +10.7% and only slipped -1.0% for the week. The real outlier for the week though were utility stocks rallying +2.5%, following bonds higher on a weak economic report on Wednesday, and continued higher the remainder of the week. In spite of the week’s big gain, utilities remain lower for the year by -4.0%.

International stocks decline along with U.S. stocks but did hold up relatively well. For the week, international developed stocks loss just -0.4% and are now just fractionally higher year-to-date. European markets held up fairly well while Australia’s market declined -2.3%. International emerging markets were lower by -1.1% but still hold the lead for 2018 with a gain of +4.4%. Brazil’s market, one of the best performing in 2018 with a gain of +10.3%, lost -3.0% this week. Another surprising year-to-date winner is Russia’s market up +9.0% but lower this week by -2.8%. It needs to be noted that Russia’s market is very small compared to others in the world as illustrated in the accompany graphic that sizes each country by the market value of its stock market.

Along with international stocks, non-traditional investments also held up better this week than U.S. stocks. Real estate did the best, up +0.5% for the week, as nearly all interest rate sensitive investments gained ground. This small gain helped ease the pain for investors in real estate but this group remains down -7.7% for 2018. Commodities were flat for the week and are up fractionally year-to-date. Gold declined by -0.7% as fears of inflation subsided.

Bonds posted one of their better week’s performances for 2018 with a gain of +0.3%. Helping prices this week were multiple economic reports including one showing weak retail sales and two others indicated inflation is less of a concern than thought just 30 days ago. Year-to-date the bond market remains lower by -2.5%.

Stock Highlights

Micron Technology (MU), a computer chip maker, received positive comments from Wall Street analysts that pushed its stock higher for the week by +11.0%. These analysts are optimistic about the company’s outlook helped by recent sales gains as illustrated in the accompanying graph. This stock has had a great start to 2018 with a gain of +47.3% following a 2017 gain of +87.6%!

Dollar General (DG), a $23 billion in sales discount retailer, reported better than expected quarterly results including same-store sales higher by a very impressive +7.5%. The company went on to raise earnings estimates for 2018, increased its dividend by +12%, and authorized an increase in its share repurchase program by $1 billion. These strong results were well received by investors with the stock higher for the week by +9.8% which brought it into positive territory for the year by +2.6%.

Activision Blizzard (ATVI), a maker of video games with a $54 billion market value, saw its stock decline by -8.4% during the week. The stock has had a strong start in 2018 still higher by +13.2% in spite of this week’s loss. This company has some extremely successful game franchises including Candy Crush and Call of Duty. The business has though gone through a long period of nearly no sales growth from 2010 – 2016 that could cause some concerns about the future for investors.

Boeing (BA), a world leading aircraft manufacturer, has seen its stock drift lower the past three week on fears that tariffs will be a negative for the company. The stock fell -6.8% for the week, losing -14.1 billion in market value, and is now off nearly -10% from its peak a few weeks ago. In spite of this loss, the stock is still higher by +12.1% but the recent trend, combined with headlines about possible trade wars, could have shareholders concerned.

Economic Indicator - Reported

February Retail Sales were clearly a disappointment showing a decline of -0.1% for the month as compared to economists’ average estimate of a gain of +0.4%. This now is the third consecutive month of declines raising some concerns about overall economic growth in the first quarter and beyond. There was a lot of optimism for February that numbers would be strong as consumers begin to see the benefits of the big tax cuts.

Easing some concerns about consumer spending is that the overall retail sales report was meaningfully impacted by a not-surprising -0.9% drop in vehicle sales due to hurricanes in 2017 that pulled sales forward. Furthermore, the year-over-year overall numbers remain strong at +4.0%.

Inflation fears meaningfully eased with the February Consumer Price Index (CPI) showing an as expected gain of +0.2%. This comes off the January report that helped rock the stock market showing prices higher by +0.5%. Helping hold down prices were vehicles prices lower by -0.5%, as discounting persists due to weak sales, and communications costs (wireless phone costs) down -0.5%.The Producer Price Index (PPI) also came in at +0.2% as economists had expected. This follows a January report of +0.4%.

Economic Indicators – Upcoming

Two reports will provide an update on the housing markets. Existing home sales are expected to be lower by -3.2% for the month and -4.8% compared to the same time last year. There continues to be a lack of homes for sale creating the slow sales environment.

One of the reasons for fewer existing homes for sale is that new home construction is near a 60-year record low according to Federal Reserve Bank data. This is being impacted by both higher land and construction costs. A report on New Homes Sales for February is expected this week.

Durable Goods Orders, new orders placed with domestic factories, are expected to increase by +1.7% in February according to economists’ estimates. This would be a strong rebound from January’s -3.7% that was significantly impacted by a drop in aircraft-related orders. The core number, excluding transportation, is expected to be strong at +0.6% as compared to January’s -0.2%.

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