Broader Market Pauses but Small-Caps Hit New Highs

The major market indices finished the week modestly lower reflecting building caution in light of rising rates and higher energy prices.

May 21, 2018    |    By Mike Schwager

Performance for Week Ending 5/18/18:

The Dow Jones Industrial Average (Dow) lost 0.47%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) declined by 0.29%, the Standard & Poor’s 500 Index (S&P 500) dipped 0.54% and the Nasdaq Composite Index (NASDAQ) shed 0.66%. Sector breadth was negative with 7 of the 11 of the S&P sector groups finishing lower. The Real Estate sector (-3.21%) led the decline followed by Utilities (-3.17%) and Technology (-1.54%). On the upside, the Materials sector (+1.60%) was the best performer.

Index* Closing Price 5/18/2018 Percentage Change for Week Ending 5/18/2018 Year-to-Date Percentage Change Through 5/18/2018
Dow 24715.09 -0.47% -0.02%
Wilshire 5000 28267.05 -0.29% +1.77%
S&P 500 2712.97 -0.54% +1.47%
NASDAQ 7354.34 -0.66% +6.53%

*See below for Index Definitions

MARKET OBSERVATIONS: 5/14/2018 – 5/18/2018

The major market indices finished the week modestly lower reflecting building caution in light of rising rates and higher energy prices. Uncertainty over a trade war with China and geopolitical tensions with North Korea also weighed on sentiment.

While higher rates and rising energy prices are a sign of a reflating economy, the uptick in both are raising worries over the impact on consumer spending (which accounts for about two-thirds of economic growth). As an example, the rise in oil prices has led to a surge in gasoline prices (as a rough rule of thumb, every 1-cent rise in gasoline prices translates to just over $1 billion of spending on an annualized basis). Since the start of the year, gasoline has gained 42-cents per gallon, if sustained at current levels, this creates a de facto “energy tax” of over $42 billion on the US consumers. The rise in rates is leading to an uptick in financing costs especially for large ticket items like autos and houses. A recent report from the Mortgage Bankers Association showed mortgage applications falling for a fourth straight week and according to data from Freddie Mac, the 30-year fixed-rate mortgage averaged 4.61% in the week ending May 17, marking the highest level since May 2011.

News Highs for the R2K: While the recent jump in rates and oil are starting to make investors a bit nervous, the appetite for risk assets hasn't completely been snuffed out as suggested by the gains in the small-cap Russell 2000 Index, which finished the week at a new all-time high. Investors have been rotating into small caps over recent weeks due to their minimal exposure to US dollar strength and because they are fairly insulated from trade tariff tensions due to their mostly domestic focus. The R2K finished the week up 1.24% and has gained 5.93% year-to-date.

Economic Momentum Returning: After a lull in many economic data points during the first quarter, recent data suggests that upward momentum is beginning to return. Last week, the Commerce Department reported that retail sales during the month of April rose by 0.3% and the prior month’s data was upwardly revised to 0.8% from the initial estimate of 0.6%. Meanwhile, the New York Fed reported that manufacturing activity in the greater NY area expanded at a much better than expected pace during May. The Empire Index came in at 20.1 (readings above zero signal expansion) from 15.8 in March. The forward looking new orders component jumped to 16.0 from 9.0 during the prior month. Elsewhere, manufacturing conditions in the Philadelphia region also expanded at a very strong pace during May. As with the NY Empire Index, the “guts” of the Philly report were also solid with new orders, the employment index and shipments all showing strong gains. Reflecting the rebound in economic momentum, the Atlanta Fed’s GDP-Nowcast Index is forecasting Q2 GDP growth of 4.1%, a solid advance from the 2.3% gain during Q1.

Market View: While the level of ‘noise’ (tariffs, political turnover, etc.) in the marketplace remains elevated, when looking beyond the noise and focusing on the underlying fundamental drivers of equity markets, the macro environment remains supportive. The global economy continues to show synchronized growth, the domestic earnings outlook remains robust, inflation remains relatively tame and while the Fed will continue to gradually tighten monetary policy, interest rates will remain low by historical standards. We also have to remember that higher rates tend to be a byproduct of a better growth outlook and by historical standards, equity markets, more often than not, have done well in a rising rate environment – at least to a point.

Historically bull markets continue until there are growing signs of recession. That is certainly not the case today. The yield curve remains positively sloped and the Leading Economic Indicators Index has been growing at a robust pace. As a firm, we are not forecasting a recession until late-2019/early 2020. Investors tend to discount the arrival of recession by a about seven months, on average, before it actually begins, suggesting the market still has room to advance but may begin to face some headwinds around mid/late next year.

The Week Ahead: First quarter earnings season will all but wrap up during the upcoming week with 21 members of the S&P 500 scheduled to report results. Retailers will once again dominate the earnings calendar with notable reports coming from Target Corp. and Lowe’s Companies. Reports of interest on the data calendar include; the May composite Purchasing Managers’ Index (PMI), April new home sales, April existing home sales, the University of Michigan’s final May consumer sentiment survey and April durable goods orders. The minutes from the May Federal Open Market Committee (FOMC) meeting will also be watched closely for clues on the path forward. Six Federal Reserve officials are scheduled to make public appearances during the week.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

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