Performance for Week Ending 3/16/2018:
The Dow Jones Industrial Average (Dow) lost 1.54%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) fell 1.10%, the Standard & Poor’s 500 Index (S&P 500) dipped 1.24% and the Nasdaq Composite Index (NASDAQ) shed 1.04%. Sector breadth was negative with 9 of the 11 S&P sector groups finishing lower. The Materials sector (-3.21%) led the way lower followed by Financials (-2.40%) and Consumer Staples (-2.12%).
||Closing Price 3/16/2018
||Percentage Change for Week Ending 3/16/2018
||Year-to-Date Percentage Change Through 3/16/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 3/12/2018 – 3/16/2018
The major market indices finished the week lower reflecting political uncertainty, trade war concerns and some mixed economic data. Caution ahead of the upcoming Federal Open Market Committee (FOMC) meeting also appeared to keep investors close to the sidelines.
Politics: The recent wave of departures and turmoil in Trump’s inner circle continues to weigh on investor sentiment. On Tuesday, President Trump announced the firing of U.S. Secretary of State Rex Tillerson. While not a total surprise, the timing caught many off guard. As part of the announcement, CIA director Mike Pompeo, an ex-congressman who has endorsed “pushing back against the Chinese threat,” was selected to replace Tillerson. Later in the week, media outlets were reporting that National Security Adviser H.R. McMaster could be next to depart the White House. Meanwhile special counsel Robert Mueller subpoenaed documents from President Trump's businesses that may have potential ties to Russia.
Following the recent resignation of National Economic Council Direct Gary Cohn, it was announced that economist and CNBC commentator Larry Kudlow would become his replacement. Market’s breathed a sigh of relief as the appointment helped modestly soften concerns over a brewing trade war as Kudlow is known to be a staunch advocate of free trade and is well regarded by Wall Street.
Trade: Fears of a global trade war remained front and center, although a statement from White House trade adviser Peter Navarro seem to temporarily pacify concerns. Speaking on CNBC, Navarro played down the chances of a trade war due to protectionist policies. Navarro said U.S. investors should “relax” over fears that new trade penalties will spark a skirmish that could hurt the world economy. Navarro also called Trump’s decisions “firm, but flexible.”
The announced tariffs on imported steel and aluminum will have very little economic impact, however, as mentioned in last week’s update, the question of whether the tariffs will trigger retaliation by the European Union, China and other countries remains. The EU has already threatened to slap tariffs on roughly $3.5 billion in U.S. exports if its member countries are hit with the duties. In addition, China recently warned that it could make a "justified and necessary response" should a trade war between the world's two biggest economies escalate. The problem from an investment point of view is that trade tensions are not a one off event, but an ongoing process and therefore the fluidity of the situation could remain a source of near-term uncertainty for the markets.
Fed Meeting: The FOMC is set to gather on Tuesday and Wednesday and is widely expected to lift its benchmark lending rate by a quarter percent. While a hike in rates is all but a foregone conclusion, it remains an open question whether the Fed will lift its expectations for the pace of future rate hikes. Many economists are expecting the Fed’s after meeting communique and Chairman Powell’s press conference to take on a more hawkish tone and based on recent Fed-speak, the so-called dot plot may shift to reflect the possibility of four rate hikes (up from three in the December update). While a shift in rate hike expectations could move higher, it’s equally possible that the Fed could wait until the June meeting to signal a more aggressive path, giving them three additional months of data to evaluate.
Economic Data – Mixed Bag: The Commerce Department reported that retail sales during the month of February fell 0.1%, the third straight monthly decline and well short of the +0.3% gain expected by economists. Excluding Autos, sales rose by 0.2% but were below the forecasted 0.4% gain. Following the weaker than expected Retail Sales report, the Atlanta Fed GDP-Now tracking model for the first quarter was revised to +1.80%, now well below the initial estimate of over 5% in early-February. With consumer spending accounting for nearly two-thirds of economic activity in the US, the recent trend of slowing sales is clearly something to keep a close eye on.
Two areas that contrast with the recent weakness in consumer spending are the strong labor markets and elevated levels of consumer sentiment. Following the recent strong monthly payroll report, the weekly initial jobless claims data signaled that the labor markets remain in solid shape. According to the Labor Department, initial jobless claims during the week ended March 10 fell to 226K, modestly better than economists’ expectations and just off the lowest level in 48 years. On the sentiment front, the University of Michigan Consumer Sentiment Index for March jumped to the highest level since 2004. The continued strength in both jobs and consumer sentiment suggest that the recent softness in consumer spending may prove temporary.
Meanwhile, regional manufacturing indicators remain strong. Last week the New York Fed reported that manufacturing activity in the greater NY area perked up during the month of March. The Empire Index came in at +22.5 (readings above zero signal expansion) from +13.1 last month. The “guts” of the report were also favorable with the forward looking new orders component rising to +16.8 from +13.5 last month. Shipments jumped to 27.0 from 12.5 during February. Elsewhere, manufacturing conditions in the Philadelphia region expanded at a slower pace in March according to the latest Philadelphia Fed manufacturing index. The measure dipped to 22.3 from 25.8 last month, but still remained solidly in expansionary territory.
Market View: Despite the recent political “noise” and trade war concerns, the broader narrative surrounding the market still remains favorable. While 2018 is expected to deliver another year of positive returns, they are not likely to be as robust as what we saw in 2017. At the end of the day, it’s fundamentals that matter, and the macro landscape still appears supportive for equities. We remain in an environment of synchronized global growth, robust earnings growth and the recent pullback in markets coupled with rising earnings expectations have led to more reasonable valuation levels.
While the recent choppiness in the market has provided a “reality check” to the market bulls and additional selling pressure certainly cannot be ruled out, assuming that macro fundamentals remain stable, market weakness would be viewed as an opportunity to add equity exposure to portfolios, especially for investors with a longer time horizon.
The Week Ahead: The focal point of the upcoming week will be the two-day FOMC meeting on Tuesday and Wednesday. The decision on rates will be delivered at 2:00pm ET on Wednesday, followed by a press conference from Fed Chair Powell at 2:30pm ET. First quarter earnings will kick-off in earnest this week with nine members of the S&P 500 scheduled to release results. The data calendar will be on the lighter side but a few reports will be watched closely. Reports of interest include; February existing home sales, February durable goods orders and February new home sales. The Fed speaking calendar will be limited with just three Federal Reserve officials scheduled to make public appearances.
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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