Last Week’s Market Activity
- After hitting a new record on Tuesday, the S&P 500 Index sold off -1.8% Wednesday on fears the growing controversies around the Trump Administration will cause a delay in the pro-growth policy agenda, including tax reform, deregulation and infrastructure spending.
- Stocks stabilized on Thursday and Friday, recovering ~1.0%, but pared gains both days going into the close of trading.
- For the week, major U.S. equity indexes fell ~-0.5% as investors’ focus switched from political headline risks to positive fundamentals supporting economic and profit growth.
- Financials were the worst performing sector (-1.0%) on the week, followed by industrials (-0.3%); defensives and dividend paying sectors in favor, with real estate (+1.2%), consumer staples (+0.5%) and utilities (+0.5%) leading.
- The yield on the 10-year Treasury held steady around 2.24%, while the U.S. dollar lost -1.6% for its worst week since July.
- Despite expectations for a June rate hike, the market does not fear an aggressive stance by the Federal Reserve (Fed).
- COMEX Gold was +2.0% on the week; copper also climbed 2.0% Friday.
- WTI crude oil rose +2.0% to $50/barrel on Friday, +5.0% on the week in anticipation of further Organization of the Petroleum Exporting Countries (OPEC) production cuts at meeting in Vienna on 5/25.
Overnight & This Morning
- Stocks in Asia were mostly positive as MSCI EMG had biggest climb (+0.90%) in two weeks, led by commodity producers.
- North Korea fired another missile, yet Korean won moved higher on naming of new finance minister.
- Japanese shares were boosted by weaker yen and exports rose for a 5th consecutive month in April, up 7.5% year over year.
- Hong Kong’s Hang Seng closed at its highest level since July 2015.
- Australian stocks rose despite S&P reducing credit ratings for many of their banks on concerns over property prices and potential rise in credit losses.
- In Europe, shares were up ~0.2% with gains in real estate, energy and mining shares.
- German bunds slipped to 0.38% on the 10-year and euro held around $1.11.
- European Union ministers are meeting in Brussels to discuss Greek bailout and refine plans for Brexit negotiations.
- In UK election, the Tory lead over Labour has narrowed considerably, from almost 20 points last month to just 10 points this morning.
- Commodities – WTI crude oil +0.9% to $51.10/barrel; COMEX gold slipped to $1254/oz. while copper is higher by 0.20%.
- Major U.S. indexes up slightly along with Treasury yields as investors judge recent selloff on political turmoil may have been excessive.
- U.S. fiscal policy needs to become primary growth driver for 2018. President Trump releases his administration’s budget plans Tuesday, including economic projections and spending plans for federal agencies and entitlement programs. Congressional Republicans must first agree on a budget if they want to achieve tax reform this year; intraparty fighting must cease if Republicans want to maintain majority after next year’s midterms. History is littered with examples of “wave” elections after one party assumes power. However, if Republicans see an expiration date on their majority; similar to Democrats in 2010 and Republicans in 2006, these developments may result in more legislation passing. We are likely to see an infrastructure plan in the coming weeks and the Senate appears to have progressed on tax reform plan, which doesn’t include BAT or removal of corporate interest deduction.
- Despite paring losses Thursday and Friday, risk-off vibe still apparent with dollar weakness, yield curve flattening, VIX higher, and bank, small cap and transport stocks all underperforming. However, there is little stress evident in U.S. credit markets with credit default swaps, investment grade and high yield spreads all contained. The economy continues to benefit from pent up demand in capital expenditures, housing and an inventory rebuild from a Q1 drawdown.
- Unofficial last week of an excellent earnings season. With just 28 S&P 500 companies left to report results, S&P 500 earnings growth for the first quarter is tracking to a very strong +15.2% year-over-year increase, 5% above prior (4/1/17) estimates (thanks to a 75% beat rate), and +11.1% excluding energy. Technology jumped ahead of financials and materials last week into second place in the earnings growth rankings (energy is first), while industrials, energy and materials have produced the most upside to prior estimates. This week 19 S&P 500 companies are slated to report.
- Guidance may be the most impressive part of earnings season. We were very impressed that company outlooks were positive enough to keep estimates for the balance of 2017 firm, amidst heightened policy uncertainty and the slowdown in economic growth in the first quarter. Consumer discretionary, industrials, technology, financials and healthcare sectors have all seen consensus estimates for 2017 and 2018 rise, as has the S&P 500, over the past month; and consensus estimates reflect a solid 9% increase in earnings over the next four quarters versus the prior four.
- This week, we try to help investors stay focused on fundamentals. Market participants became increasingly worried that the Trump administration’s agenda was in danger last week following the latest news surrounding the investigation into the Trump campaign’s ties to Russia. After its biggest one-day drop in nearly a year on Wednesday, the S&P 500 recovered nicely Thursday and Friday to end the week less than 1% off its all-time closing high. We don’t know what will happen with the Russia investigation, but we think we have a pretty good handle on the basic fundamentals of the economy and corporate profits, which look good right now, tend to drive stocks over time, and are where we think investors should be focused.
- This week, we also take a look at inflation. With the unemployment rate unlikely to go much lower, Fed watchers are becoming increasingly focused on the other half of the Federal Reserve’s dual mandate, low and stable inflation. Despite disappointing gross domestic product (GDP) growth in the first quarter, consensus forecasts indicate expectations of better growth over the rest of the year, which would likely be accompanied by an uptick in inflation above the Fed’s 2% target. However, there are still many factors that limit the possibility of runaway inflation. Better growth would likely give us enough inflation for the Fed to follow through on raising rates twice more in 2017, but we don’t expect inflation to reach a level that would push the Fed to move faster.
- What does the large drop on Wednesday mean? The S&P 500 Index fell 1.8% on Wednesday and has bounced back the past two days. Nonetheless, Wednesday was the worst one-day drop since September and given it happened within 0.5% of all-time highs, the question is: What does a large drop near all-time highs mean?
- This week’s domestic economic calendar includes data on preliminary purchasing manager surveys (manufacturing and services) from Markit, housing, trade, durable goods, and revised first quarter gross domestic product (GDP). The Fed will remain in focus with minutes from the May 3 Federal Open Market Committee (FOMC) meeting due out Wednesday (May 24) and several Fed speakers on the docket-a roughly even balance of hawks and doves. We believe the market is correctly pricing in a June 14 rate hike. Overseas economic calendars are busy with a series of data in Europe, including first quarter German and U.K. GDP, German business confidence, and Eurozone purchasing manager surveys; and in Japan (trade, manufacturing and inflation data). Political troubles in Brazil may continue to weigh on emerging market indexes.
- Chicago Fed National Activity Index (Apr)
- New Home Sales (Apr)
- Richmond Fed Report (May)
- Germany: GDP (Q1)
- Germany: Ifo (May)
- France: Mfg. Confidence (May)
- BOJ: Kuroda
- Japan: All Industry Activity Index (Mar)
- Japan: Machine Tool Orders (Apr)
- Japan: Nikkei Japan Mfg. PMI (May)
- Markit Mfg. PMI (May)
- Markit Services PMI (May)
- Existing Home Sales (Apr)
- FOMC Meeting Minutes (May 3)
- France: Markit Mfg. & Services PMI (May)
- Germany: Markit Mfg. & Services PMI (May)
- Eurozone: Markit Mfg. & Services PMI (May)
- Canada: BOC Rate Decision (May 24)
- Advance Goods Trade Balance (Apr)
- Wholesale Inventories (Apr)
- Initial Jobless Claims (May 20)
- UK: GDP (Q1)
- Italy: Industrial Orders & Sales (Mar)
- Japan: CPI (Apr)
- Japan: Tokyo CPI (May)
- GDP (Q1)
- Personal Consumption (Q1)
- Durable Goods Orders (Apr)
- Capital Goods Shipments & Orders (Apr)
- Italy: Business Confidence in the Mfg. Sector (May)
- Italy: G7 Leaders Meet in Sicily
- BOJ: Kuroda
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