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Market Commentary - Week Ending 4/14/2018

Summary

  • Markets recovered some of their recent losses with stocks higher around the world
  • The first glimpse of first quarter earnings are good but investors were not impressed
  • Two reports show mixed signs of inflation

Market Performance Summary

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

Notable Market Headlines

Stock markets were higher around the world, with a few limited exceptions, as investors breathed a sigh of relief, at least for now, that the U.S. and China will hopefully not go into a full-on trade war. Small U.S. stocks led the rally with a gain of +2.4% for the week followed by large U.S. stocks higher by +2.1%. Small stocks are in positive territory year-to-date by +1.0% while large stocks remain lower for 2018 by just -0.6%.

This week’s gains did not come without continued volatility but it was meaningfully less so than last week. One simple measure is the average daily point swing in the Dow Jones Industrial Average. This week the average move per day was 327 points, or 1.3%, as compared to nearly 600 points per day on average the week before. That’s a welcome relief for most investors. The popular Volatility Index, or VIX, receded as well to a reading of 17.41. As the accompanying graph shows, the VIX was very low in January and then surged more than 3 times higher. It’s certainly declined from its recent highs by remains about twice as high as it was in January.

Source: www.yahoo.com/finance for ^VIX

There were some sectors performing far better than others for the week including a surge in energy stocks. Fueling this rally was the price of oil closing at a three-year high on predictions of strong demand and potential geopolitical risks to supplies. Energy stocks gained +6.2% for the week but remain lower year-to-date by -1.2%. The second standout sector was technology moving higher by +3.8% making it the best performing sector in 2018 higher by +5.0%.

International stocks were higher as well but there were some mixed results. Developed country stocks gained +2.0% for the week with Eurozone and Australian stocks doing well and Japan’s market lagging behind. Year-to-date these markets are up an average of +0.7%. Emerging markets gained but lagged behind with prices higher by +1.0%. There was strength in many markets including China’s markets rallying +3.5%. On the downside was the Russian market plunging -10.4% as investors reacted to new sanctions by the U.S.

The alternative asset classes were mixed this week. Commodities, dominated by energy related commodities as shown in the accompanying chart, surged +5.4% on higher oil prices. Of the asset classes we track, this is the best performer year-to-date with a gain of +5.5%. Gold also moved higher by +0.8% for the week and has had a relatively strong year-to-date gain of +3.1%.

Source: : S&P GSCI Index; https://en.wikipedia.org/wiki/S%26P_GSCI

Anything that is sensitive to interest rate moves declined in value for the week. Real estate fell by -0.5% and remains the worst performer year-to-date with a decline of -8.8%. Utility stocks did worse with a -1.1% decline for the week. And bonds had fractional losses, down just -0.1%, as investors gravitated away from these safe havens.

Stock Highlights

Mark Zuckerberg, the CEO and founder of social media giant Facebook (FB), faced questioning from congress for two days related to its use of and protection of user data. This is being closely watched by many investors due to the long-term impact possible new regulations could have on the entire tech sector. Facebook’s stock rallied sharply on the first day of questioning and held onto those gains on the second day resulting in the stock higher for the week by +4.6%. The stock remains lower year-to-date by -6.8% while the average tech stock is higher.

First quarter earnings season kicked off with a few major banks leading the way. As illustrated in the accompanying table, earnings for all three of these banks came in better than Wall Street estimates. Although the circumstances are different for each, all three stocks declined on the day of the report and closed the week mixed. There is a lot of optimism around this earnings season, and results will likely be very good, but the reaction by investors is impossible to predict.

Source: : S&P Compustat; https://www.nasdaq.com/earnings/earnings-calendar.aspx?date=2018-Apr-13

American Airlines Group (AAL), one of the nation’s largest airlines, provided updated guidance that was overall very positive. Revenue per seat mile, a key metric, is expected higher andprofit margins are improving. In spite of this good news, the stock was the biggest loser among the stocks in the S&P 500 this week declining -8.8%. A surge in oil prices, a huge cost to all airlines, was the culprit.

Lennar Corp. (LEN), a massive homebuilder, was among the worst performing stocks this week with a decline of -7.5%. There was no significant news this week. The decline did coincide with a decline in the stocks of other homebuilders including Pulte Group (PHM) and D.R. Horton (DHI).Lennar’s price declines this week follow gains in the prior week on a report of strong quarterly results as noted in our blog.

Economic Indicator - Reported

Reports on inflation were mixed for the month of March. The Consumer Price Index (CPI) headline number came in at -0.1%, slightly lower than estimates, but when excluding volatile food and energy prices the index gained +0.2% as expected. Year-over-year the index, less food and energy, is higher by +2.1%. Causing a little concern though was the Produce Price Index (PPI) coming in at +0.3% as compared to an estimate of just +0.1%. Metals prices were among the bigger movers higher in an initial reaction to tariffs imposed by the Trump administration.

Consumer Sentiment, reported by the University of Michigan, came in below estimates at a reading of 97.8. The index remains near multi-year highs.

Economic Indicators – Upcoming

Retails Sales will be reported for March with an expected gain of +0.4% as compared to a disappointing February number of -0.1%. Vehicle sales are expected to help this report while lower gasoline prices will be a negative. Excluding autos and gas economists estimate and even better number at +0.5%.

Industrial Production for March is expected to show a relatively robust gain of +0.4% but well below the prior month’s +1.1% jump. The manufacturing sector has been holding back growth in past months and is expected to continue doing so in March.

March Housing Starts are expected to come in at an annual rate of 1.269 million representing a healthy gain over the prior month. This would be welcome news for the industry as low supplies have been holding down sales.

Contact Mark A. Patton :