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Market Commentary - Week Ending 4/28/2018

Summary

  • The yield on 10-year U.S. Treasuries touched above 3% for the first time since 2014
  • The economy cooled in the first quarter but grew meaningfully faster than expected
  • Earnings reports continue to come in strong but investors remain cautious

Market Performance Summary

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

Notable Market Headlines

Stock market around the world were little changed for the week in one of the least volatile weeks of trading we’ve seen in 2018. This reduced volatility is in spite of a host of information for investors to digest including earnings reports from some of the market’s leading companies, bond yields continuing higher, and historic interaction between the leaders of North and South Korea.

At the end of the week, U.S. large stocks closed essentially unchanged, as measured by the S&P 500, and remain down fractionally for the year. The NASDAQ Composite was off -0.4% with continued selling in some large technology stocks and the Dow Industrials lost -0.6% due to some key earnings disappointments. U.S. small stocks this week gave back -0.6% of their year’s gains but do remain higher by +1.5% in 2018.

International markets showed little movement during the week as well with developed markets down -0.1% and emerging markets unchanged. One standout in the emerging markets was South Korea its market up +2.1% presumably on the possibility of improvement relations with North Korea.

Real estate stocks were the big winner this week with gains of +3.7%. This was welcomed relief for investors in these stocks as they are still down -6.4% for year but the losses have trimmed. With bond yields higher this week, it would be expected that these stocks would fall but strong earnings reports helped. One notable was Simon Property Group (SPG), the owner of many shopping malls, reporting results much better than expected which fueled a rally in many related stocks.

Commodities held onto their 2018 gains, down -0.1% for the week but still higher by +6.7% for the year. Gold lost -0.9% for the week but is also positive year-to-date by +1.5%. Bonds closed unchanged but the 10-Year U.S. Treasury yield did top 3% for the first time since 2014. Continued higher yields would be a good sign for the economy but could put some downward pressure on stocks as investors reprice them for the higher interest rate environment.

Stock Highlights

Facebook (FB), the social media giant, has been the focus of some negative attention in the first quarter but none of it hurt quarterly results. The company reported first quarter revenue of nearly $12 billion and earnings per share of $1.69. Both were well ahead of Wall Street expectations. The number of active users came in as expected with 1.45 billion on a daily basis. The number of employees increased by 48% as compared to last year to 27,742. The stock jumped on the news closing the week up +4.4% but remains off its high by -10%.

Amazon (AMZN) surprised investors this week with earnings that were far above expectations. Revenue exceeded $51 billion for the quarter and earnings per share came in at $3.27 versus an estimate of $1.26. The company is seeing strong growth across the board with North American revenue up +46% and international revenue growing by +34%. They also announced a 20% price increase for their Prime Membership to $119. This will add an additional $2 billion to the bottom line. The stock surged on the news then retreated but still closed higher for the week by +6.8% and is higher year-to-date by +34.5%.

Source: https://www.cnbc.com/2018/04/26/amazon-earnings-q1-2018.html

Chipotle Mexican Grill (CMG), an operator of more than 2,000 restaurants, reported some good news of strong results for the quarter. This comes after a couple of tough years for the company with customers getting sick at its restaurants resulting in sales and earnings challenges. Sales and earnings both grew for the quarter with same-store sales up +2.2%. The company has a new CEO and is in the early stages of a turnarounds. Investors were impressed with the stock surging +28.7% for the week and is higher year-to-date by +47.9%.

Charter Communications (CHTR), one of the nation’s cable TV giants, reported losing 122,000 residential video subscribers and 52,000 voice subscribers in the first quarter. This was much worse than had been expected and at an accelerated paces compared to 2017. The positive news is that the company’s internet business continues to growth with 331,000 new subscribers. Investors were not impressed with the stock down for the week by -15.3% and now off -33% from its 2017 all-time high.

Economic Indicator - Reported

The first read on first quarter Gross Domestic Product (GDP) was meaningfully strong than expected growing +2.3% while economists’ forecast was at +1.8%. Although the report was better than expected, it was a cooling down from the +3.0% growth rate during the last three quarters of 2017.

Consumers spending, which accounts for about 70% of the economies total output, grew by only +1.1% after having been very strong in the fourth quarter. Business investments rose by +6.1% which could fuel increased worker productivity in the future.

There are some high expectations for the tax bill that was recently signed by President Trump that it should stimulate both consumer and business spending. So far this doesn’t appear to be dramatically impacting spending behavior but it could take months or a few years for the full benefit of such a change to be fully reflected.

The S&P Corelogic Case-Shiller Housing Price Index, a measure of housing prices in 20 cities, increased by +0.8% in the most recent month, the same as the prior month and slightly better than forecasts. As the accompanying graph shows, the pace at which prices have been increasing, the right side of the graph, has been picking up since mid-2016. This trend could raise some concerns that the housing market is overheating.

Source: : spindices.com – S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index

New home sales were stronger than forecast at 694,000 and up from the prior month’s 618,000. Furthermore, there were positive revisions to prior periods. Existing home sales rose in March by 1.1%, again better than forecasts. Helping sales is additional supply coming into the market.

Economic Indicators – Upcoming

We will get the all-important employment report for April with economists estimating the economy added 190,000 new jobs. This would be a significant rebound from March’s low 103,000 jobs. The unemployment rate is forecast to fall by 0.1% to 4.0%. The rise in wages will be closely watched for any signs of upward pressure as the number of available workers continues to tighten although the forecast is for a gain of just +0.2%.

Motor vehicle sales, a significant piece of consumer spending, are expected to come in at an annualized rate of 17.2 million. This would be down from last month’s 17.5 million but anything greater than 17 million is considered a positive sign for the consumer.

Contact Mark A. Patton :