Performance for Week Ending 5/11/18:
The Dow Jones Industrial Average (Dow) gained 2.34%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.36%, the Standard & Poor’s 500 Index (S&P 500) rose 2.41% and the Nasdaq Composite Index (NASDAQ) tacked on 2.68%. Sector performance was positive with 9 of the 11 of the S&P sector groups finishing higher. The Energy sector (+3.75%) was the best performer while the Utilities sector (-2.27%) was the biggest loser.
||Closing Price 5/11/2018
||Percentage Change for Week Ending 5/11/2018
||Year-to-Date Percentage Change Through 5/11/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 5/7/2018 – 5/11/2018
The major market indices finished the week solidly higher with the S&P 500 posting its biggest weekly gain since early March. The broader market index is now up by over 5% since the year-to-date low reached in early February. Driving the weekly gains were easing worries over trade tensions with China, a tame reading on consumer inflation and the solid wrap-up to first quarter earnings season. Geopolitics were also in focus after President Trump announced on Twitter that he and North Korean President Kim Jong Un will meet in Singapore on June 12.
Trend Breakout: Technicals may have also been in play last week as recent gains pushed the S&P through it down trend line from the late January and back above its 50, 100 & 200 day moving averages. The breakout above these key resistance areas was likely being viewed as an all-clear sign and a signal that the worst of the 3-plus month correction may now behind – stay tuned.
More Signs of Muted Inflation: Fears that inflation is picking up and the Fed would need to accelerate its rate hiking campaign has been a major headwind to the market over the past few months. Inflation worries, however, have faded a bit following the recent release of consumer inflation and wage data. Last week the Labor Department reported that the consumer price index (CPI) during the month of April increased 0.2%, slightly less than economists’ expectations, as rising costs for gasoline and rental accommodation were tempered by a moderation in healthcare prices. Core CPI, which excludes food and energy prices, edged up 0.1%, slower than the previous two months. Other data reports showing inflation falling short of expectations include the April import price index and the recently reported monthly payroll data that showed wage growth remained relatively muted.
Q1 Earnings Roundup: With over 90 percent of the members of the S&P 500 already reporting results, Q1 earnings season is all but a wrap. Overall first quarter results for the S&P 500 were very strong with over 80 percent of the companies surprising to the upside (average upside surprise was over 7%). Aggregate growth is running in excess of 23 percent, putting the quarter on target for the best in seven years. While the change in corporate taxation was certainly a key driver, top line growth was also robust with aggregate growth coming in at over 8 percent.
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 environment remains robust, inflation remains relatively muted 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: Earnings season continues to wind down with just 10 members of the S&P 500 scheduled to report results. The retailing sector will be the focal point of the earnings calendar with Home Depot, Macy’s, Nordstrom and Walmart all releasing results. On the data front, reports of interest include: April retail sales, the May Empire State Manufacturing Survey, March business inventories, May housing market index, April housing starts and building permits, April industrial production, and the May Philly Fed Business Outlook Survey. The Fed speaking calendar will be very busy with almost a dozen speeches scheduled.
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.
The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.
The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.
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