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10 March, 2018 Market Commentary

Market Commentary - Week 10, 2018


Market Commentary - Week Ending 3/10/2018

Summary

  • Stocks rally to within 3% of their all-time highs
  • The economy shows signs of strength with more than 300,000 jobs added in February
  • Inflation fears subside as wages tick higher by just +0.1% in February

Market Performance Summary

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

Notable Market Headlines

Stocks around the world rallied higher with the U.S. markets leading the way. Strong economic data combined with easing fears about inflation helped propel markets higher. This strength was tempered though by the resignation of President Trump’s top economic advisor Gary Cohn and new tariffs being implemented in the steel and aluminum markets.

Small U.S. stocks posted the biggest gains for the week moving higher by +4.3%. U.S. large stocks came in at the number two spot with a gain of +3.6%. Year-to-date large stocks, up +4.5%, have done slightly better than small stocks which are higher by +4.2%. The technology sector has been, by far, the best performing sector year-to-date up +11.8% and once again had posted the biggest gains of the week of +4.4%.

International stocks have been a slightly more mixed bag in 2018 with developed country stocks lagging well behind emerging markets and U.S. markets higher by just +2.0% this week. This week’s gain puts these stocks back into positive territory year-to-date by only +0.7%. The accompanying graph shows the year-to-date performance of select developed markets. Japan, the biggest of these markets accounting for nearly 25% of the entire developed markets index, is higher by just over 1% for the year while the second largest market, the United Kingdom, is down by more than -2%.

International emerging markets are faring much better developed markets gaining +3.4% for the week, still lagging U.S. markets, but higher by +5.6% year-to-date which puts them in the lead worldwide so far in 2018. This strength is a continuation of their momentum in 2017 and a great sign of investor confidence with a willingness to own these riskier markets during the recent bout of volatility.

The less traditional assets have had a mixed performance in 2018 and all lagged behind for the week. Commodities, driven primarily by oil, were higher by +0.3% for the week, well behind the gain of stocks but are neck and neck year-to-date. Gold, in a sign of easing fears of inflation, gained just +0.1% for the week and is higher by only +1.5% in 2018. Gold did demonstrate its ability to provide diversification value in a portfolio and help mitigate some losses as it declined just -2% or so while stocks corrected by nearly -10% during the past six weeks.

Real estate, and all assets that are sensitive to higher interest rates, continues to suffer in 2018. For the week, real estate did rally with the overall market gaining +2.8% but remains lower for the year by -8.2%. Utilities stocks, generally big dividend payers, and bonds are feeling this same downward pressure this year with the utility sector down -6.3% and bonds off by -2.8%.

Stock Highlights

In a sign that the appetite for growth is strong, insurer AXA announced an acquisition deal to purchase insurer XL Group (XL) for $15.3 billion in cash. AXA has primarily been focused on the life insurance markets and this acquisition will give it a strong position in the property and casualty business. This announcement was great for XL Group shareholders given the purchase prices was well above its current stock prices. XL Group stock surged this week, adding to its already health year-to-date gains, by +28.5%.

Autodesk (ADSK), a design software and services company with about $2 billion in annual revenue, reported quarterly results that were better than expectations including sales growing by +15.7% compared to the prior year. This company continues to execute its plan to be more of a reoccurring revenue model as subscription revenues surged +105%. Investors and Wall Street analysts alike praised the results and the stock surged to record highs with a gain this week of +19.8%. As the accompanying graph shows, this stock’s performance has been very strong year-to-date.

Wynn Resorts (WYNN), the embattled casino company whose stock sold off sharply earlier this year following sexual misconduct allegations by the company’s founder and CEO, has been quietly rallying back. This week the stock was among the biggest winners in the S&P 500 with a gain of +15.8% on no news of any consequence. This week’s rally puts the stock back into positive territory for the year, up +12.0%, and ahead of its biggest competitors Las Vegas Sands (LVS) and MGM Resorts International (MGM). Apparently investors believe the company will continue to thrive without its founder at the helm.

Kroger (KR), the giant grocery store chain, continues to face pressure from the likes of Walmart and Amazon, reported mixed quarterly results this week. Sales topped Wall Street estimates and earnings came in as expected but profit margins came in below expectations indicating competitive pressures. Although Walmart has put pressure on pricing for Kroger, as the accompany graph shows, Kroger’s stock has delivered a better 10-year return to investors in spite of Kroger’s precipitous decline the past two years. This week the stock was lower by -12.0%.

Economic Indicator - Reported

The February employment report came in much stronger than expected with the economy created 313,000 new jobs as compared to economists’ consensus of 205,000 (the most optimistic estimate was 230,000). In addition to the strong February, numbers were revised meaningfully higher for both December and January.

The strength in new jobs created was surprisingly NOT accompanied by wage pressures. The estimate was for wages to increase by +0.2% to an annual rate of +2.9% but instead wages gained just +0.1% for the month resulting in an annual gain of +2.6%. It was signs of inflation in this report and others that has been blamed for the selloff in the stock market the last six weeks so this data was very much welcomed by investors.

Economic Indicators – Upcoming

Retails sales, a huge component of the overall economy and a sign of the consumer, will be reported for February. The expectation is that sales rose +0.4% which would be a sharp reversal from the January report showing a decline of -0.3%.

Two reports on inflation, both the Consumer Price Index (CPI) and the Producer Price Index (PPI), will be closely watched by investors as fears still permeate throughout the market. The CPI is expected to come in at +0.2% which would be a very welcomed following January’s report of +0.5%. The PPI is also expected at +0.2% in February which, again, would be much lower than January’s +0.4%.

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