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Week Ending 2/17/2017

Summary

  • U.S. stocks continue setting record highs
  • Federal Reserve signals rate hike next month
  • Kraft Heinz makes $143 billion offer for U.K.’s Unilever
  • U.S. gauge of inflation rose more than expected

U.S. stocks continued their record setting pace with the S&P 500 gaining 1.5% for the week and is now higher for the year by 5.2%. Healthcare and financials were the two industries leading the rally higher with both up more than 2% for the week.

The rally in the price of gold took a pause, gaining just a fraction of a percent for the week, but remains higher by more than 7% for the year. It is suggested that this year’s rally is due to gold being seen as a safe haven during uncertain times. Inconsistent with this argument though is the very low volatility of stocks.

Investor Trivia Question

After a month with President Trump in office, how has Mexico’s and Russia’s stock markets performed? (answer at the bottom)

Notable Market Headlines

  • Federal Reserve signals rate hike – Fed Chairwoman Janet Yellen signaled the Fed could raise interest rates during the March meeting. This would follow a rate hike in December of 0.25%. Yellen cites a strong U.S. economy and rising inflation as support for this potential hike.
  • Kraft Heinz makes $143 billion unsolicited offer for U.K.’s Unilever – this offer was well-received by Wall Street with Kraft Heinz stock jumping 11%. Some analysts estimate that the two combined companies could have as much as $5 billion in annual cost savings. Unilever’s CEO responded by saying he does not believe Kraft Heinz would be a good fit and the offer was later withdrawn. Unilever’s problem is likely more about the price that was offered.
  • Snap Inc. IPO – the company behind the popular Snapchat messaging app set a valuation for itself at $19.5 - $22.2 billion. This is at the low end of the estimate range. This will be the largest tech IPO since 2014 and will be closely watched by investors looking for signs of a revival in IPOs.
  • 10-Year Government Bond Yield at 2.418% – the yield jumped on the Fed’s signal to raise rates in March but then retreated from those highs for the remainder of the week closing just slightly higher for the week.

Market Leaders

Dun & Bradstreet – last week’s loser, down 18%, was one of this week’s winners gaining more than 7%. Investors appear to have overreacted to the company’s earnings report the prior week as analysts remain bullish on the stock.

5 of the top 10 performers were health care stocks. Leading the way was specialty pharmaceutical company Mallinckrodt up 11% for the week as its stock rallies off of 6 month lows.

Bank of America was in the top 20 performers with its total value rising more than $14 billion or more than 6%. This was one of the many winners in the financial sector this week as hopes rise that interest rates will soon move higher.

Market Laggards

Tripadvisor – the stock of this popular travel website fell 9.5% for the week on another disappointing earnings report (see graph). Year-to-date the stock remains higher by 1.5% but was down 45% in 2016.

Campbell Soup and General Mills – the stocks of both food giants fell for the week reacting to the news that Kraft Heinz made a bid for Unilever. Such as merger is seen as added competition for these companies.

18 of the 50 biggest losers were energy stocks. This is a bit surprising given there was no major move in the price of oil. All of these stocks are coming off of big rallies in 2016.

Economic Indicator - Reported

Both the Produce Price Index (PPI), a measure of wholesale inflation, and the Consumer Price Index (CPI), a measure of retail inflation, rose more than expected in January. The CPI jumped 0.6%, well above the range of estimates of 0.2% to 0.4%, driven by a wide range of consumer product prices moving higher including the price of gasoline up 7.8%. The annual increase in CPI is now 2.5% which is above the Fed’s target of 2%.

Retail Sales, accounting for about two-thirds of the U.S. economy, climbed a better than expected 0.4% in January. Excluding auto sales, which had jumped in December, sales were higher by 0.8%.

Housing Starts came in lower as expected for January falling 2.6% but actually above estimates. Single family started were higher but were offset by a sharp 10.2% drop in multi-family (apartments) starts. Housing is a very important component of the economy and driver of retails sales.

Economic Indicators – Upcoming

Existing homes sales, new home sales, and jobless claims will be reported this week but are not expected to be market moving numbers.

Investor Trivia ANSWER

Surprising many investors, Mexico’s stock market has risen 4% year-to-date while Russia’s has fallen 1.1%. This doesn’t tell the entire story though. Since Trump won the election in November, Mexico’s market is down 13.4% and Russia’s has rallied 15.1%. Clearly the initial reaction be investors to the election has subsided so far in 2017.

Source: S&P Compustat as of February 17, 2017

Contact Mark A. Patton :