Performance for Week Ending 6/15/18:
The Dow Jones Industrial Average (Dow) lost 0.89%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.16%, the Standard & Poor’s 500 Index (S&P 500) rose by 0.01% and the Nasdaq Composite Index (NASDAQ) tacked on 1.32%. Sector breadth was mixed with 5 of the S&P sector groups finishing higher while 6 closed lower. The Utility sector (+2.55%) was the best performer while the Energy sector (-3.10%) was the worst.
||Closing Price 6/15/2018
||Percentage Change for Week Ending 6/15/2018
||Year-to-Date Percentage Change Through 6/15/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 6/11/2018 – 6/15/2018
The major market indices finished the week mixed as investors digested the more hawkish than expected tone out of the FOMC meeting and renewed trade tensions with China. On Friday, President Trump imposed tariffs on about $50 billion in imports from China, claiming the additional tariffs are justified due to the theft of intellectual property. Beijing said it would respond swiftly to the tariffs by imposing levies on American imports. In addition, according to media reports, the Trump administration is putting together a second list of tariffs on an additional $100 billion in Chinese goods. The trade actions rattled the market due to rising fear that a broader trade war could develop.
FOMC Meeting: As expected, Fed officials raised interest rates by a quarter percent for the second time this year and upgraded their forward forecast to four (from three) total increases in 2018. The FOMC indicated that even though it's stepping up the pace of interest-rate hikes, economic growth should continue apace. “The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee's symmetric 2 percent objective over the medium term,” according to the after meeting statement. While the course of interest-rate hikes remains gradual, the slightly more aggressive pace shows officials see more urgency to tighten policy, as unemployment has already fallen to the level they had forecast for year-end.
Powell Presser: During Chairman Powell’s after meeting press conference, the Fed chief said that the Fed meets 8 times a year and at each meeting takes a fresh look at the economy. As such, Powell announced that starting in January there will be a press conference after every meeting. While Powell added that the action should not be viewed as a change in their rate strategy, the market seemed to view the announcement as a bit hawkish since it will give the FOMC the option for earlier hikes (note: In recent times the Fed has only elected to hike rates at its quarterly meetings as each was followed by a press conference which gave them the ability to explain the action). When asked about the potential impact on economic growth due to the tariffs, Powell responded by saying that he has not seen any ill-effects on the data, but also revealed that conversations with corporate heads suggest rising concern amongst the business community.
US/NK Summit: The historic US/North Korea summit concluded with an as expected result (i.e. cordial meeting with a promise to continue talking). The two leaders did sign a document asserting the U.S. President would provide unspecified “security guarantees” in exchange for the North Korean leader’s commitment to complete denuclearization. Trump said while North Korea has committed to denuclearize, sanctions will remain in effect for the meantime. The meeting was generally shrugged off by investors with many seeing the meeting as big on optics, but light on details.
Economy Gaining Momentum: Economic data last week continued to confirm the economy has picked up momentum during the current quarter. On Thursday, the Commerce Department reported that retail sales jumped 0.8% in May, the most in eight months, and double the consensus estimate of 0.4%. Additionally, the previous month was revised up to 0.4% from 0.3%. Sales have rebounded this quarter from a lackluster Q1, which was suppressed by a delay in tax refunds and severe snowstorms in parts of the country. Meanwhile the Labor Department reported that initial jobless claims fell 4K last week to 218K, its third decline in a row and modestly better than the 223K forecast by economists. The four-week average of claims ticked down by to 224.3K, near its lowest level since March 1973. As a result of the stronger than expected data, the Atlanta Fed GDP Now tracking model upwardly revised its estimated Q2 growth to 4.8% from 4.6%.
Market View: While the level of ‘noise’ (tariffs, geopolitics, political uncertainty, 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 domestic economy is showing signs of upward momentum, the 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 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: Housing will be the major focal point of the data calendar with reports due out on the June housing market index, May housing starts and building permits, and May existing home sales. Other reports of interest include; the Philly Fed manufacturing survey and the June Purchasing Managers’ Index (PMI) Composite. Second-quarter earnings reports will begin to drip out with seven members of the S&P 500 scheduled to release results. Four Fed Heads are scheduled to make appearances during the week including a speech in Portugal by Fed Chair Powell. Also of interest will be the OPEC meeting on Friday and the results of the Fed’s 2018 stress tests on the US banking sector on Thursday.
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.
This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.
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*Assets under management is as of 09.30.2018 and includes leverage of $11.8bn.
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