Performance for Week Ending 6/1/18:
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.
||Closing Price 6/1/2018
||Percentage Change for Week Ending 6/1/2018
||Year-to-Date Percentage Change Through 6/1/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 5/28/2018 – 6/1/2018
You’re fired … The major market indices finished the week mixed to lower on renewed fears of a growing trade war and political dysfunction in Europe. After announcing tariffs on imported steel and aluminum back in March, the Trump administration proceeded to carved out temporary exemptions for Canada, Mexico and the European Union in an effort to give the countries time to work things out. The exemptions expired on June 1 without a resolution, and in turn, reignited fears that a brewing trade war is back on the table. The tariffs will levy duties of 25% on foreign made steel and 10% on foreign made aluminum. Not surprising, Canada, Mexico and the European Union all announced retaliation measures.
As we wrote in mid-March, the announced tariffs on imported steel and aluminum will have minimal economic impact, however, trade tensions are rarely a one off event. Instead they tend to be an ongoing process and therefore the fluidity of the situation could remain a source of uncertainty for the markets. The likelihood of a full blown trade war coming to fruition still seems low (although the probability is certainly rising), however the ongoing rhetoric could prove to be a near-term headwind for the market. At the end of the day, no one wins in a trade war. While the direct economic impact of tariffs is relatively small, the impact on financial markets and business sentiment due to the uncertainty could prove much more costly – stay tuned.
You’re hired … Beyond the so-called trade “noise,” the fundamental environment still remains supportive. The economy remains in great shape as witnessed by the stronger than expected monthly Payroll report and ISM manufacturing survey. On Friday the Labor Department reported that nonfarm payrolls expanded by 223K, solidly above the 190K expected by economists. The unemployment rate fell to 3.755% (unrounded), the lowest level in almost 5 decades. Average hourly earnings rose by a better than expected 0.3% and are up 2.7% on a year-over-year basis. Earlier in the week, the Institute for Supply Management (ISM) reported that manufacturing activity in the US expanded at a better than expected pace during the month of May. After dipping during the prior two months, the ISM Index came in at 58.7 from a reading of 57.3 in April (Note: readings above 50 signal expansion). In addition, the forward looking new orders component jumped to 63.7 (from 61.2) the highest level in three months. All in all, after a “weak patch” during the first quarter, the economy appears to be picking up some steam. According the Atlanta Fed GDP Now model, second quarter growth is tracking at a very robust 4.8% pace, well above the 2.2% growth seen in the first quarter.
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 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 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: The data and earnings calendar will be very light during the coming week, in line with the typical lull that follows the monthly Payroll report. Just four members of the S&P 500 are scheduled to release results. Highlights of the data calendar include April factory orders, the Institute for Supply Management’s (ISM) May non-manufacturing Index, the April JOLTS report and weekly jobless claims. The Fed speaking calendar is nonexistent due to the traditional blackout period ahead of the upcoming (June 12 & 13) Federal Open Market Committee (FOMC) meeting.
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.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
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