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Week Ending 5/6/2017

Summary

  • The S&P 500 and NASDAQ Composite closed at record highs
  • European stocks clocked the biggest gains for the week with Spain and Italy’s markets both up more than 6%
  • The U.S. employment report comes in strong following a weaker than expected first quarter
  • The Fed leaves interest rates unchanged and seen hiking two more times in 2017

Notable Market Headlines

U.S. stocks closed at records highs with the S&P 500, the barometer for U.S. large stocks, gaining +0.68%. These gains were helped by a strong U.S. employment report (discussed more below). Small U.S. stocks trailed behind with just fractional gains for the week. The standout performing sector was technology stocks, up +1.6%, helped by such giants as Apple and Google.

Although U.S. stocks posted respectable gains, international developed country stocks led the way for a second consecutive week gaining +2.81%. International emerging markets lagged behind with gains of +0.36%. Among the developed country stocks, Eurozone markets were the clear winners with Italy and Spain’s market both up more than 6%, French stocks gained +5.2%, and Germany’s market rose +4.0%. Eurozone stocks are now higher by +19.1% year-to-date…see in the below chart how this compares to other markets around the world.

Real estate, gold, commodities, and bonds were all lower for the week. Real estate was down just a fraction of a percent and remains lower year-to-date. Gold finished the week off more than -3% closing at $1,228 per ounce. Gold is now off more than -11% from its recent high less than a year ago as a sign that inflation fears remain low.

Commodity prices, down -2.7% for the week and -10.4% year-to-date, were harshly impacted by a steep decline in the price of oil of nearly $3 per barrel this week. The price of oil is at about the same level it was a year ago but down -18% from its recent high at the start of this year.

U.S. bonds edged lower by -0.38% this week as yields inched higher. The Federal Reserve left interest rates unchanged as widely expected. The strong employment report is believed to give the Fed more confidence in the strength of the economy and keep them on track for two more expected rate hikes in 2017.

Investor Trivia Question

Apple reported earnings that initially disappointed investors but its stock rallied late in the week to close at an all-time record high. At Friday’s close, the company has a market value of $776 billion, the largest in the U.S. today and at any point in the past!

Apple’s stock is 1 of the 500 in the S&P 500 index. The lowest market value stock in the S&P 500 index is trucking company Ryder Systems valued at $3.6 billion. How many companies, starting with Ryder and working through the next largest stocks, does it take to add up to the value of Apple?

See below for answer.

Winners and Losers by Sector

Market Leaders

Coach (COH), the designer and retailer of luxury goods, reported better than expected earnings resulting in its stock jumping +8.3% for the week. The stock is now up +21% for the year but remains -45% off its high hit more than 5 years ago. This company, like many in its space, has been struggling to grow with sales peaking in 2013, as seen in the below graph, and now hopefully staging a recovery.

Airline stocks were among some of the bigger winners this week:

  • United (UAL): +7.3%
  • Delta (DAL): +7.2%
  • American (AAL): +4.4%
  • Southwest (LUV): +3.9%

One factor explaining the strong performance for these stocks was a sharp drop in the price of oil that should drive lower costs. Furthermore, executives from United, American, and Southwest were in D.C. this week being questions by a congressional committee about their customer service given the events in recent weeks. The incident with United obviously sparked these concern but, interesting enough, its stock has performed better than both American and Delta year-to-date as seen in the below chart:

Market Laggards

Advanced Micro Devices (AMD), a computer chip maker, reported sales and earnings that were in-line with Wall Street expectations but said profit margins for the current quarter were below expectations. The stock plummeted -23.4%. AMD’s biggest competitor is Intel (INTC), a company nearly 20 TIMES the size of AMD. As rough as it was for AMD’s stock this week, it remains higher by an incredible +274% during the past 12 months!

Media giant Viacom (VIAB) saw its stock drop -13.5% following a BETTER than expected earnings report. The stock fell on the news that cable giant Charter Communications is going to make some of Viacom’s most popular channels more expensive to Charter subscribers and could result in a loss of revenue for Viacom. This stock is now off -21% from its March 31 high but still up about 5% for the year.

Economic Indicator - Reported

The U.S. employment report for April showed the economy adding 211,000 new jobs. This is strong rebound from March’s disappointment of a revised gain of only 79,000 jobs. April’s report was at the top end of expectations and was accompanied by a separate report showing the unemployment rate falling -0.1% to 4.4%. Confounding economists though is that wages are only up +2.5% during the past year. They have been expecting more wage inflation given the very low unemployment rate but this has yet to materialize.

Worker productivity fell in the first quarter at an annualized rate of -0.6%. This means that it took longer to make things and raises the cost to do so. Meaningful productivity gains have been elusive for multiple years keeping a lid on the standard of living in the U.S. One explanation that has been given for this is the unwillingness of business to invest in equipment and the like but there is hope that this trend may be turning.

Economic Indicators – Upcoming

Retails Sales will be reported for April. Given other positive signs in the economy, economists are expecting a jump of +0.6% after a fairly disappointing first quarter. This is an important report given that retail sales account for the largest portion of the U.S. total economy.

This week we will get two reads on inflation with both the Producer Price Index (PPI) and the Consumer Price Index (CPI) being reported. Economists’ consensus is for a rise of +0.2% for the CPI following a decline in March.

Investor Trivia ANSWER

103! The 103 smallest companies in the S&P 500, starting with Ryder Systems on the low end at $3.6 billion all the way to Alaska Air valued at $10.3 billion, add up the same value as Apple!

Source: Standard & Poor’s Research Insight

Contact Mark A. Patton :