Market Commentary - Week Ending 6/2/2018


  • Italy’s market was extremely volatile and rattled markets worldwide on political concerns
  • The U.S. unemployment rate drops to an 18-year low as hiring continues at a brisk pace
  • Technology stocks hit all-time record highs

Market Performance Summary

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

Notable Market Headlines

U.S. stocks moved higher during the holiday shortened week while international stocks continued to face some downward pressure. At the close of the week large U.S. stocks were higher by +0.5% but did have some volatility with the Dow Industrials moving more than 200 points during all 4 trading days. Small U.S. stocks had a relatively strong week gaining +1.5% as investors appear to be betting that the continued strong economy will be better for smaller companies than larger. Year-to-date small stocks are outpacing large stocks by a 5.0% margin with small stocks up +7.5% and large up +2.5%.

Five months into the year Technology is by far the leading sector. This week the sector hit a new high for the year, and all-time high, both exceeding the highs in January as well as those in mid-March. As the accompany graph shows these strong gains, up +13.1% for the year, have not come without some significant volatility causing some investors to question if the strength of this sector can continue. It is also worth noting the investing in Tech stocks has not always been a winning investment as the sector peaked in 2000, lost more than 80% of its value, and did not fully recover until 2017.

Source: www.YahooFinance.com

The performance of various market sectors has been all over the map year-to-date as the accompany graph shows. Again Tech has lead the way nearly doubling the performance of the next best sector being Consumer Discretionary, a sector including stocks such as Netflix (NFLX), TripAdvisor (TRIP), and Macy’s (M). Energy stocks had a strong week gaining +2.5% and are higher by +6.0% year-to-date. One disappointment for many investors has been the flat performance for the Financial sector which is expected to benefit from rising interest rates.

Source: S&P Compustat

International markets had a lot of news to digest and weathered it all relatively well. Developed market stocks fell just -0.3% and are lower by -0.4% year-to-date. The biggest headlines came from Italy as the government remains in a state of relative chaos. Surprisingly though the market there lost just -0.8% of its value after a sharp drop on Tuesday then recovering a lot of those losses. Year-to-date Italy’s market is down just -0.3% as compared to Spain, as an example, is grabbing less headlines right now but it lower for the year by -5.8%. Emerging markets were also lower by -0.2%. Brazil’s market was a notable loser down -3.9% and off -11.5% for the year on concerns about their economy and rampant inflation.

Real estate continues to mount a strong recovery higher by +2.2% for the week and now off just -2.5% year-to-date after having been off -12.6% in early February. Both gold and commodities were down for the week by -0.6% and -1.2% respectively.

Bond prices were down fractionally for the week and still off -3.0% year-to-date. The yields on the benchmark 10-year U.S. Treasury closed the week at 2.902% after having jumped above 3% a couple of weeks ago rattling some investors. Continued signs that inflation remains moderate, supported by this week’s employment report, have eased some concerns for now.

Stock Highlights

General Motors (GM) stock had its best daily performance since emerging from bankruptcy less than 10 years ago. It was reported that a tech-oriented fund will invest $2.25 billion in GM’s autonomous-vehicle unit Cruise. GM has promised to launch a self-driving car with no steering wheel and no pedals by 2019. The momentum and competition in the self-driving car space is clearly hot and expectations are high. GM’s stock surged +12.8% for the week.

Nektar Therapeutics (NKTR), a research-based biopharmaceutical company, announced it has filed for approval from the FDA a painkiller for chronic back pain that could work better than opioids. If they are successful, the market for such a treatment could be huge. Investing in the stock has not been for the faint of heart as the accompanying graph shows. Furthermore, it is 25-year history the company has never made a profit but that could be changing. The stock was higher by +13.0% this week and +284% during the past 12 months!

Source: www.YahooFinance.com

Dollar Tree (DLTR), a leading discount retailer with $22 billion in annual sales, reported quarterly results that were higher than the year before but below Wall Street estimates. The CEO said higher freight costs, colder-than-normal spring weather, and an earlier Easter holiday were headwinds but same-store sales still were higher by +4%. This did not impress investors with the stock falling -14.6% for the week and down -24.3% year-to-date.

Economic Indicator - Reported

The May employment report came in well ahead of economists’ expectations, topping even the most optimistic forecasts, with 223,000 new jobs added for the month following April’s job gains of 164,000. The unemployment rate fell to an 18-year low of 3.8%. This is the lowest level since April 2000 which matched the lowest level reading since 1969.

The labor participation rate, the percent of the population employed or seeking employment, fell to 62.7% due to fewer people looking for jobs. In spite of this very tight labor market, wage inflation remains contained at just 2.7% year-over-year. This is very good news as investors were frightened earlier this year by concerns of inflation.

The second estimate of first quarter Gross Domestic Product (GDP), the U.S. economy’s broadest measure, came in as expected as first estimated at +2.2%. Estimates for the second quarter have growth returning closer to +3%.

Housing prices cooled slightly relative to expectations in the most recent month. The S&P Corelogic Case-Shiller Housing Price Index rose +0.5% as compared to a forecast of +0.7%. Of the 20 cities in the index, those in the West (Seattle, Las Vegas, and Phoenix) generally are strong with gains of +1.0% or more. Dallas prices were higher by just +0.2% while Atlanta and Charlotte were only slightly better.

Economic Indicators – Upcoming

It’s going to be a quiet week for economic reports with nothing expected that would move the markets.

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