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Market Commentary for the week ending May 18th, 2019

Summary

  • Small stocks and emerging markets suffered the biggest losses for the week as investors backed away from these riskier markets
  • Tensions remain higher between the U.S. and China on trade
  • Retail sales disappointed in April indicating a slow start to the second quarter

 

Market Performance Summary

Source: www.YCharts.com

Notable Market Headlines

Stocks sold off around the world with riskier markets taking the biggest hits. The week started with stock prices moving sharply lower on word that a trade deal between the U.S. and China had stalled. On Monday alone the U.S. markets fell -2.4% as measured by the S&P 500 though China’s markets continue to suffer bigger blows falling -3.2%. For the next three days prices generally moved higher then slipped again on Friday resulting in a down week for nearly all markets around the world.

Large U.S. stocks closed the week down -0.8% as measured by the S&P 500 while the Dow Industrials fell a similar amount and the tech-heavy NASDAQ lagged behind with a loss of -1.3%. Small U.S. stocks suffered much larger losses down -2.4% for the week. The poorest performing sector this week was financials with the stocks of several banks, brokerage firms, and insurance companies lower. Year-to-date U.S. stocks are holding onto very solid gains with large stocks up +14.4% and small stocks higher by +14.1%.

International stocks were lower with U.S. markets with developed markets down -0.9%. But it was emerging markets that really felts some pain falling -4.0% for the week alone. There was weakness across the board with a couple of the worst being Brazil’s market down -8.1% and now in negative territory year-to-date while Taiwanese stocks fell -5.5%.

There has been a quick and sharp reversal for emerging markets the past few weeks as the accompanying graph shows. At the start of the year emerging markets were slightly outpacing large U.S. stocks and even through early April the gap was narrow. But during the past 5-6 weeks emerging markets have faced significant selling pressure wiping out a larger portion of the year’s gains. Emerging markets remain higher for the year by +3.1% compared to just over a month ago when they were higher by +14.1%.

Source: www.YahooFinance.com

Diversified portfolios were generally helped by allocations to less traditional asset classes. Real estate stocks posted relatively strong gains up +1.3% for the week and now command the best year-to-date performance of +16.5%. Commodities performed even been, up +1.9%, as the price of oil recovered some of its recent losses. Year-to-date the prices of a barrel of oil has climbed $46.93 to $62.71 or +33.6%. Gold continues to be the laggard down -0.6% for the week and a similar amount year-to-date.

Bond prices gained ground as investors shied away from riskier assets. For the week bonds were higher by +0.3% and up +2.5% year-to-date. The yield on the U.S. 10 Year Treasury Note, the benchmark for the markets, closed at 2.393% which was down for the week and approaching the lowers for the year hit in late March.

Stock Highlights

Apple (AAPL)’s stock fell -4.1% for the week losing about $35 billion in market value. This week the U.S. Supreme Court gave the go-ahead to an antitrust lawsuit accusing Apple of forcing consumer to overpay for the apps sold through its App Store. The plaintiffs claim Apple monopolized the market causing consumers to pay higher prices. This puts the company as risk of potentially billions of dollars in fines and the loss of a lucrative long-term stream of profits. Apple’s stock is off its record highs by -18.6% while the S&P 500 is off just about -3% from its highs.

Under Armour (UA), a sports apparel business, received positive comments from an influential Wall Street analyst this week that helped its stock. The J.P. Morgan analyst upgraded the stock to a buy rating after a meeting with the company CEO suggesting the management team has a tone of “controlled confidence”. As the accompanying graph shows sales growth has been much slower the past 4 quarters for Under Armour as compared to its much larger rival Nike (NKE). Regardless this was a good week for the stock with it jumping +8.2% and now up +33.5% for the year.

Source: www.YCharts.com

Cisco Systems (CSCO), a leading manufacturer of computer networking equipment and more with a market value of $248 billion, reported strong quarterly results driven by multiple factors. The company produced revenue of $13.0 billion resulting in an +18% jump in earnings per share both of which marginally topped Wall Street estimates. Management provided an optimistic outlook for the future which was well received by investors pushing its stock higher by +5.6% for the week leaving it up +30.1% year-to-date.

Deere & Co. (DE), a leading manufacturer and distributor of agriculture equipment worldwide, is facing pressures from multiple angles. The company reported quarterly results that were below expectations and went on to say the outlook was questionable. The trade war with China is impacting agriculture exports which is leaving U.S. farmers uncertain about the future and hesitant to buy new equipment combined with weather related issues at home. At the close of the week Deere’s stock was down -13.6% and is now lower by -9.6% in 2019.

Economic Indicator - Reported

Retails sales had been expected to inch higher by +0.1% in April but instead fell by -0.2%. This disappointment does follow a very robust +1.7% gain in March. This month there was weakness in auto dealership sales, electronics, and home and garden centers. There was a jump in gasoline sales due to higher prices which is not good news for consumers.

Industrial Production, a major component of the economy impacting the bulk of the change in output over the course of the business cycle, fell by -0.5% in April which was meaningfully worse than economists’ estimate of a -0.1% decline. The Federal Reserve said there was weakness reported in most major market groups. Furthermore capacity utilization also fell more than expected to 77.9%.

Housing Starts suggest the housing market is improving coming in above expectations at 1.235 million units annualized. In spite of the increase the pace of activity is still running below last year’s level.

Consumer Sentiment, measured by the University of Michigan, jumped to a 15-year high of 102.4 compared to April’s reading of 97.2. Economists had guessed it would fall slightly. The strong jobs market seems to be fueling confidence but it is noted this reading was taken before trade negotiations with China deteriorated which could result in a future drop in confidence.

Economic Indicators – Upcoming

The following economic data is expected in the coming week:

  • Existing Home Sales are expected to have improved in April while New Home Sales are forecast to have softened in the same month
  • Durable Goods Orders are expected lower by -2.3%

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