The WMA Weekly Market Wrap – 2/26/2018

February 27, 2019

The Streak Continues

On Christmas Eve, most people involved in the markets seemed to think stocks had further to fall, perhaps a lot further. Accordingly, right at the low people were worried that the low was still a significant ways away. I saw the same thing in March of 2009. Now we are two months later, and the S&P 500 is up roughly 18 percent since Christmas Eve. That’s a huge gain for such a short amount of time. We have seen nine straight weeks of gains.

Domestic equities moved modestly higher again last week, helping the Dow record its longest streak of weekly gains in nearly a quarter of a century. Materials and utilities stocks led the gains within the S&P 500, while healthcare shares trailed, held down in part by a disappointing 2019 earnings projection from CVS. Communication services stocks were also weak following disappointing results from video gaming companies. Nearly 90 percent of S&P 500 companies had reported fourth-quarter results by the end of the week, according to Thomson Reuters.

One driver of the week’s gains appeared to be the release of the minutes from the Federal Reserve’s last policy meeting, which highlighted that Fed officials aren’t sure they need to raise rates this year. Policymakers also indicated that they would stop shrinking the central bank’s balance sheet by the end of the year, a drawdown that has slowly been removing liquidity from the financial system since late 2017.

The trade picture brightened somewhat, supporting stock prices, on reports that trade negotiations with the U.S. were picking up, increasing the likelihood of a bilateral trade deal before a temporary truce ends March 1. On Friday, U.S. President Donald Trump met Chinese Vice Premier Liu He, the country’s top trade negotiator, following the week’s lower level trade talks, after which Mr. Trump said that he will “probably” host Chinese President Xi Jinping next month at his Mar-a-Lago estate in Florida and expects to finalize a sweeping trade agreement that would end a nearly year-long tariff war. However, multiple reports suggest that the two sides remain far apart.

The week’s economic data were mixed, but some concerning reports released Thursday may have weighed on sentiment a bit. Core (ex-aircraft and defense) durable goods orders fell back in December, continuing a pattern of slowing business investment. A more current gauge of factory activity in the mid-Atlantic also surprised on the downside, and existing home sales in January fell back to their lowest level in over three years. On the positive side, weekly jobless claims fell more than expected, and IHS Markit’s gauge of service sector activity surprised on the upside.

Longer-term bond yields remained roughly steady for the week. The benchmark 10-year U.S. Treasury note started and ended last week yielding 2.65 percent.

Overseas, the pan-European STOXX Europe 600 rose throughout the back half of the week amid investor optimism on trade. The UK FTSE 100 lost ground, however, as the possibility of a no-deal Brexit grew. In Japan, the Nikkei 225 shrugged off disappointing economic data and rallied 2.5 percent for the week. The large-cap and small-cap TOPIX indexes also generated strong gains of about 2 percent for the week.Chinese stocks also posted a weekly gain, also on trade optimism.

Other news and notes follow:

  • Datatrek Research points out that the year’s first month typically sets a trend for the first quarter. January’s S&P 500 return of 7.9 percent was more than one standard deviation above the mean monthly return (+1.1 percent). In the eight complete years over the past 60 years when January has posted similarly strong results, February tacked on an average 1.3 percent further gain. In those same eight years, March returns averaged another 1.5 percent advance and in no case did any of these eight years show a negative Q1 return.
  • BMO Capital Markets interest-rate strategist Jon Hill argues the current rally in stocks is not based on positive growth expectations for the economy, but on the Fed’s reversal of its plan to raise interest rates.
  • Economists at ratings agency S&P Global raised the probability of a U.S. recession in 2019 to 20–25 percent Wednesday, in large part because of the flattening U.S. Treasury yield curve. That’s higher than its previous assessment of 15–20 percent three months ago. “Although economic indicators continue to point to a sustained economic expansion, heightened investor concerns over global economic developments led to market volatility and disruptions late last year, leaving a mixed picture for the second oldest expansion in U.S. history,” said Beth Ann Bovino, U.S. chief economist at S&P Global.
  • As trade negotiations with China resumed last week, the Trump administration was racing to strike a deal that will result in long-term reforms – and prove that tariffs are an effective battering ram to open markets. The parties have begun to sketch the outline of a potential deal to end their trade dispute, including work on drawing up six memoranda of understanding on structural issues. The stock market keeps getting juiced by news of progress in the trade talks, but the two countries may forever be stuck on their biggest differences because neither recognizes its own weaknesses.China’s economy is in hot water, and Beijing seems to be relying on its go-to recession-fighting strategy of encouraging lending for massive construction projects. The true leading cause of the slowdown is China’s fading growth. However, avoiding recession today could make for a disappointing tomorrow for China. China also must be fudging its unemployment numbers, which have been almost comically stable over the years. Meanwhile, the Trump administration wants China to keep its currency stable, but the yuan is tied to the dollar. Instability in this case is being imported from the U.S. And the Chinese government continues to build an enormous system of surveillance and control.
  • All major Asian economies, but for the Philippines, now see inflation rates at or below the lower end of their central banks’ target.
  • Trade tensions, slower economic growth, and Brexit are denting the outlook for companies in Europe. Positive economic news has long been absent. On account of negative yields, investors around the globe are effectively paying governments to hold more than $11 trillion of their bonds, a fresh sign of ebbing economic confidence in Europe and Japan.
  • The Trump administration is smart to commit to AI research.
  • Neither political party seems interested in talking about, much less dealing with the national debt. President Trump didn’t talk about it during his State of the Union. Neither did Stacey Abrams in her Democratic response. All told, Washington’s red-ink alarms have gone dead, even though the annual deficit will pass the trillion-dollar mark starting in 2022.
  • Does indexing threaten the market?
  • The reversal of quantitative tightening has now gone global.
  • The tech-heavy Nasdaq ended its fourth-shortest bear market ever February 15, climbing more than 20 percent above its Christmas Eve lows to start a new bull market. The Nasdaq was the last of the major indexes to leave bear market territory and is still 7.9 percent below last August’s record high.
  • The Wall Street Journal’s 2019 Tax Guide will help you sort through the confusion of doing your taxes for the first time under the new law.
  • Apple is shaking up its executive team, preparing for life after the iPhone. It is also reordering priorities across its services, artificial intelligence, hardware and retail divisions. The changes have included high-profile hires, noteworthy departures, meaningful promotions, and consequential restructurings.
  • Nike had a badly timed shoe malfunction. The stock dropped 1.27 percent, shedding $1.6 billion in market cap.
  • Kraft Heinz wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion, slashed its dividend, and disclosed an investigation by the SEC. Not surprisingly, the company’s stock was down big in response.
  • Walmart’s fourth quarter profits and revenues came in above expectations, while U.S. same-store sales rose 4.2 percent — more than the 3.2 percent analysts expected.
  • President Donald Trump wants to save coal. Glencore Plc, the world’s biggest coal supplier, is telling us that cause is already lost.
  • After tracking closely in the three decades following World War II, from 1979 to 2017 productivity grew 70.3 percent, while hourly compensation of production and nonsupervisory workers grew just 11.1 percent.
  • Even when they’re served with financial advice, Americans are stressing over going broke in retirement.
  • The three leading insurance and agent associations are working together to support a state “standard of care” proposal for agents that rejects fiduciary responsibility for agents and financial advisors.
  • Millions of Americans have been jobless for a year or more. Many can’t — or won’t — go where the jobs are.
  • The U.S. Treasury’s auction of $8 billion in 30-year inflation-protected bonds Thursday met with strong demand, a sign that some investors see potential for consumer prices to rise.
  • A senior EU economist suggests anew that the political upheaval on both sides of the Atlantic could erupt into World War III.
  • Financial Windfalls: 15 stories of the money that changed everything.
  • “Subprime” corporate debt is now a problem.
  • In January, active asset flows beat passive.
  • The greatest investor you’ve never heard of.

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