Market Commentary - Week Ending 4/7/2018
- Stocks closed lower around the world with volatility remaining high
- The U.S. employment report showed continued strength but not up to expectations
- Expectations for first quarter corporate earnings are high – reports will start in the coming week
Market Performance Summary
Source: S&P Compustat, www.yahoo.com/finance for Commodities
Notable Market Headlines
A variety of headlines seem to be capturing the attention of investors including the fears of a trade war with China, concerns about inflationary pressures, and questions about whether or not stocks are overvalued. These concerns are then confronted with relatively strong and persistent economic data and expectations that corporate earnings, which will start flowing for the first quarter in the coming week, will be very strong. The risk with earnings, of course, is whether or not companies can meet the higher expectations and what management says about the future.
Stocks did close lower around the world with large U.S. stocks down -1.3% for a year-to-date loss of -2.7%. The average daily volatility, or change from high to low, of the Dow Jones Industrials was nearly 600 points or more than 2% daily. Small U.S. stocks have been weathering the recent selloff a bit better with a decline for the week of -1.0% and a year-to-date loss of -1.4%.
The accompanying graph shows the year-to-date performance of the S&P 500, or large U.S. stocks, and the NASDAQ Composite. It was a down week but stock prices remain above the early February lows. There has been a lot of talk about technology stocks, and the NASDAQ Composite, not holding up well but it also remains well above the February lows and is performing meaningfully better year-to-date than both the S&P 500 and Dow Industrials.
International stocks fell along with U.S. stocks but performance was very different for different parts of the world. Developed markets lost only -0.4% for the week. Eurozone stocks, on average, were actually positive for the week including gains in most countries with the United Kingdom’s markets up +1.5%. It was the developed markets of both Japan and Australia that saw losses. Emerging markets suffered some larger losses this week with the average down -2.5%. Year-to-date though emerging markets are doing the best of all around the world with just fractional losses on average. This remains a good sign for the overall investments world with these riskier markets holding up well.
Diversification certainly helped portfolios this week. Gold was the only one to post gains for the week of +0.5% and is higher year-to-date by +2.2%. As a barometer for inflation, gold is still showing no signs of risk. Commodities were lower for the week by -2.1% and are generally flat for the year. Real estate remains a big loser for the year with a loss of -8.3% but has held up well during the recent selloff and was only down -0.3% for the week.
Bonds remain under pressure with the longer term expectations of higher interest rates. Bond prices declined by -0.3% this week, a bit unusual in an environment of both volatile and lower stock prices as bonds often serve as a safe haven during such times. Again, this could be considered a positive sign for the market environment that investors are not fleeing to this safe haven.
Semiconductor stocks were among the biggest losers this week as illustrated in the accompanying table. Some of the losses can be explained by specific company issues such as Xilinx (XLNX) having a significant presence in China that could be threatened by a potential trade war. Overall though these stocks are coming off of significant rallies in both 2017 and early 2018 that, in spite of the large losses this week, leave the majority of these stocks still higher year-to-date.
Humana (HUM), a $39 billion healthcare company, is reportedly in early talks with Walmart (WMT) to be acquired. Humana’s stock rallied on the news with other stocks in the sector following it higher. The two companies have had an alliance since 2005. This move is an effort by Walmart to stay competitive in an ever changing market with threats from Amazon (AMZN) and the combination of CVS Health (CVS) and Aetna announced in December.
Baker Hughes (BHGE), an oil services business, was among the best performing stocks this week in the S&P 500. This stock, as has been the case for many in the energy sector, has struggled during the past year or longer. This stock was higher by +6.5% this week on news that it is exploring the sale of a non-core division of its business and had positive comments from one Wall Street analyst. In spite of this week’s rally, the stock is still lower year-to-date and off its late 2016 high by more than -50%.
Lennar Corp. (LEN), one of our nation’s largest homebuilders, reported better than expected quarterly results. Both revenue and earnings came in better than Wall Street had predicted on both strong demand for homes and higher prices. As the accompanying graph shows, sales have been growing consistently with the most recent quarterly surging. This stock gained +4.5% for the week and is higher during the past 12 months by +15.1% but is lower year-to-date with the stock off its January high.
Economic Indicator - Reported
The headline number for the March employment report came in below expectations with 103,000 jobs created as compared to an average estimate by economists of 175,000. In addition to the March number being below expectations, revisions for the prior two months resulted in a net decline of -50,000 jobs as well. All that said, the first quarter average was 202,000 per month which is above the longer term trend but below the fourth quarter average. The unemployment rate held steady at a very low 4.1%.
The employment report did show a little pressure on higher wages, as was expected, with an increase of +0.3% for the month and up +2.7% year-over-year. This is being closely watched as the employment market gets tighter resulting in employers having to raise wages to attract and retain employees. Higher wages could cause fears of overall inflation in the economy causing the Federal Reserve to possibly raise interest rates more than is currently anticipated.
Factory Orders for February came in higher by +1.2% which was below forecasts. When excluding volatile aircraft orders, which helped in February, factory orders only increased by +0.1%. The good news in the report is a rise of +1.4% in orders for core capital goods which is a direct input in Gross Domestic Product.
Economic Indicators – Upcoming
We will get two reads on inflation in the coming week with the Consumer Price Index (CPI) expected to show retail prices unchanged for the month and the Producer Price Index (PPI) up just +0.1%. Consumer prices, when excluding volatile food and energy, are expected higher by +0.2%. Any surprises on inflation could rattle investors.
The University of Michigan’s Consumer Sentiment will be reported with a reading expected at 100.8. This would be down slightly from the prior month but still near record highs. Lower income respondents have been reporting very strong responses regarding current conditions but lower numbers regarding future expectations.