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31 March, 2018 Market Commentary

Market Commentary - Week 13, 2018


Market Commentary - Week Ending 3/31/2018

Summary

  • Market volatility persisted but stocks closed higher to snap the recent losing streak
  • Fourth quarter GDP was revised higher than had been expected
  • Housing prices increased faster than expected with the West leading the country
  • Everything related to autonomous driving, including Tesla shares, faced selling pressure

Market Performance Summary

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

Notable Market Headlines

The stock market’s volatility persisted this week with relatively sizable moves in the indexes every day. The week started with a strong rally leaving all of the major indexes higher by more than +2% as fears eased about a trade war with news of possible negotiations between the U.S. and China. Investor optimism came to a screeching halt the following afternoon as stocks collapsed into the closing bell with technology stocks seeing significant declines. The volatility eased only slightly thereafter and closed the week with a strong rally.

At the close of the week, large U.S. stocks were higher by +2.0%. There was strength across all sectors with consumer staples and financials leading the way. Technology stocks, which has seen some of the greatest volatility, lagged behind the market averages but still gained +1.5% for the week and remain the best performing sector year-to-date at +3.3%. Small U.S. stocks were higher as well with a gain of +1.2% and are off fractionally so far in 2018.

International stocks outpaced U.S. stocks for the week with developed country stocks higher by +2.6%. Japan’s market, the biggest of the developed countries, rallied +4.1% to put it back into positive territory for 2018. Emerging markets turned in an even better performance gaining +3.0%. South Korea’s market contributed meaningfully with a +5.0% gain for the week. Year-to-date developed markets are still lower by -0.9% while emerging markets are higher by +2.5%.

Real estate stocks surged this week gaining +4.2%. Many investments that are bought for their high dividend yields, including real estate and others such as utility stocks, rallied as interest rates declined. This helped a diversified portfolio this week but it’s still been challenging year-to-date as real estate stocks remain lower by -8.1%. Gold and commodities both declined for the week, down -1.4% and -0.4% respectively, but are both higher year-to-date contrary to most stocks and helping investors with well-diversified portfolios.

Bond prices moved higher this week by +0.5%. These higher prices pushed yields lower as investors expectations about inflation weakened.

Stock Highlights

Amazon (AMZN), the dominant online retailer, found itself in the crosshairs of President Trump this week. Trump tweeted about the company Thursday morning causing its stock to immediately drop more than -2% but then recovered to close higher for the day by more than 1% as the overall market surged higher. Trump’s dislike for Amazon is not new with some people saying that one issue is that Jeff Bezos, the founder of Amazon, also owns the Washington Post newspaper that tends to lean more left. Amazon’s stock fell -3.2% for the week but remains higher year-to-date by a very impressive +23.8%.

Everything related to autonomous driving took a hit this week following the death of a pedestrian by an autonomous vehicle in Arizona. One of the stocks getting hit the hardest was industry leader Tesla (TSLA). Its stock fell -11.7% for the week leaving it lower by -14.5% year-to-date. Not only was the accident headline bad for this stock but the company is burning through cash and will need to raise more soon. With its stocks well off its all-time high, as illustrated in the accompanying graph, as well as its bonds facing the same downward pressure, cash will become more expensive for the company to raise.

Macy’s Inc. (M), a traditional retailer, saw its stock rally this week along with other similar stocks. There was no news other than Trump’s recent attach on Amazon serving as a catalyst to move these stocks. Regardless, Macy’s stock was the best performer in the S&P 500 this week with a gain of +9.3%. This company and others, of course, are competing in the online space with Amazon with some success. Macy’s, in its most recently quarterly report, noted that this was the 34th consecutive quarter of double-digit growth in its digital business.

Nasdaq, Inc. (NDAQ), the operator of the NASDAQ stock exchange, was among one of the best performing stocks this week in spite of the stock market being lower including its NASDAQ Composite Index. The only news was the company’s board approving a dividend payment increase of 16% which is seen as a vote of confidence by the board in its strong financial position and outlook. In an overall lower market, this stock gained +6.8% and is up +12.2% for the year.

Economic Indicator - Reported

The S&P Corelogic Housing Price Index came in a little better than expected for the most recent month with a gain of +0.8% topping the highest forecast. Year-over year housing prices across the nation have gained +6.4% matching the 3 ½ year high that was set last November. The strongest markets are in the west as the accompanying graph shows as cities like Chicago and Washington DC have seen prices up only +2.4% during the past 12 months.

Consumers generally remain optimistic as measure by both Consumer Confidence and Consumer Sentiment. The University of Michigan’s Consumer Sentiment index came in at a 14-year high of 101.4. This was slightly below the estimate but meaningfully better than the prior month. In contrast to Consumer Sentiment, the Consumer Confidence Index, reported by the Conference Board, eased slightly from the prior month, was below forecasts, but remains near record levels. This year’s tax cut has been offsetting volatility in the stock market and keeping consumers optimistic.

The final reading for fourth quarter Gross Domestic Product (GDP) came in meaningfully higher that economists had forecast at +2.9%. The forecast was for +2.7% and the prior reading was +2.5%. Consumers were responsible for nearly the entire quarter’s growth contributing 2.8% of the 2.9% economic growth. When excluding inventories and exports, the economy growth by a very impressive +4.5% (though often the case when excluding certain segments!).

Economic Indicators – Upcoming

The March Employment Report is expected to show the economy adding 167,000 new jobs, down from February’s surge of 313,000. The unemployment rate is expected to fall to 4.0%. Also very important will be the reported change in hourly earnings which is expected at +0.2%. Any surprise to the upside here could fuel fears of inflation and possibly shake the market.

Other reports include Factory Orders expected to increase by +1.7% for the month and the PMI Manufacturing Index expected to remain strong at 55.7.

Contact Mark A. Patton :