Performance for Week Ending 3/9/2018:
The Dow Jones Industrial Average (Dow) added 3.25%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 3.52%, the Standard & Poor’s 500 Index (S&P 500) rose 3.54% and the Nasdaq Composite Index (NASDAQ) tacked on 4.17%. Sector performance was positive with all 11 of the S&P sector groups finishing higher. The Industrials sector (+4.40%) led the way followed by Financials (+4.39%) and Technology (+4.29%).
||Closing Price 3/9/2018
||Percentage Change for Week Ending 3/9/2018
||Year-to-Date Percentage Change Through 3/9/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 3/5/18 – 3/9/18
The major market indices finished the week solidly higher following the strong payroll report, reduced worries over a broad-based trade war and a modest cooling of wage growth. The latter is important as last month’s stronger than expected uptick in wage growth sparked inflation fears and ultimately led to the 10%-plus correction in the S&P 500. Adding to the positive tone was the announcement that President Trump and North Korea’s Kim Jong-Un would meet by early summer. The meeting could be the first step toward the denuclearization of North Korea and remove the region's key geo-political risk if the summit ultimately proves successful.
Goldilocks: The Labor Department reported that February nonfarm payrolls rose by a much better than expected 313K (vs. estimate of 205K) and the January numbers were upwardly revised to 239K from the original estimate of 200K. The unemployment rate was unchanged at 4.1%. The focal point of the report was the wage data which showed average hourly earnings growing by a tepid 0.1% during the month and by 2.6% on a year-over-year basis. The January wage number, which sent the market tumbling last month, was revised down to 2.8% from 2.9%. The report was viewed as ‘Goldilocks’ in nature as payroll additions were strong but wage pressure remained modest.
Tariffs not as taxing as originally feared: After putting the markets on alert about 10 days ago, President Trump officially rolled out tariffs on imported steel and aluminum. The finalized plan will impose tariffs of 25 percent on steel imports and 10 percent on aluminum, with provisional exceptions for Canada and Mexico and will go into effect by the end of the month. The proposal was more nuanced than what was initially communicated as there now seems to be room for further exemptions. The question now becomes whether the tariffs will trigger retaliation by the European Union, China and other countries? 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 warned last week 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 binary event, but an ongoing process and therefore could act as a source of near-term uncertainty for the markets – stay tuned.
Fed’s Beige Book Report: The central bank’s Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks through Feb. 26, showed that the nation's “modest to moderate” expansion was spreading the benefits of higher pay more widely. The survey also contained evidence that a pickup in inflation was more broadly based. The report may add to expectations among investors that the central bank could end up raising interest rates in 2018 by more than the 3-times that officials projected in December.
In other Fed News: One of the Fed's more dovish policy makers, Atlanta Fed President Raphael Bostic, said last week that he had upgraded his own projection to three hikes this year, from two. Fed Governor Lael Brainard, another official who has argued a cautious approach to raising rates, said the economic outlook is improving and signaled support for continued gradual rate increases. A quarter point rate hike at the upcoming (March 20 & 21) Federal Open Market Committee (FOMC) meeting appears to be all but a done deal. According to the CME FedWatch Tool, the market is predicting an 88.8% probability that the Fed will lift rates at the conclusion of the March 21 meeting. In addition, the probability of a second hike at the June meeting now stands at 73.3%.
Happy Anniversary Bull Market: Friday marked the 9th anniversary of the current bull market. On March 9, 2009, the S&P 500 hit a cycle low of 676.53, and has now gained more than 300 percent since that date. If the current bull market lasts until August 21, it will become the longest bull market since World War II, exceeding the bull market that started October 1990 and lasted until March 2000. During that time the S&P 500 rose more than 400 percent.
Market View: Despite the recent “potholes” the road ahead still looks bright. While 2018 is still expected to deliver another year of positive returns, they are not likely to be as robust as what we saw last year. The macro environment remains supportive of equities based on; synchronized global growth, robust earnings growth and expectations the Fed will maintain its gradual approach to hike interest rates.
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 data calendar will take center stage during the upcoming week with the focal point being reports on inflation. On Tuesday the Labor Department will release the February consumer price index (CPI) followed by the February producer price index (PPI) on Wednesday. Other reports of interest include; the February retail sales, the March Philadelphia Fed Business Outlook Survey, the March Empire State Manufacturing Survey, February import and export prices, the March housing market index, February housing starts and building permits, February industrial production, and the University of Michigan’s March consumer sentiment survey. Earnings reports will continue to trickle out with six members of the S&P 500 scheduled to release results. The Fed speaking calendar will be nonexistent reflecting the typical blackout period ahead of FOMC meeting (March 20 & 21).
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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