The WMA Weekly Market Wrap | 4/16/2019

April 17, 2019

Still More Strength

Most of the major domestic indexes recorded small gains last week. The large-cap S&P 500 rose 0.5 percent and moved within roughly 1.1 percent of its all-time high, established in September 2018, while the narrowly focused Dow recorded a slight loss. Trading was quiet throughout most of the week, with daily volumes hitting new year-to-date lows on Monday, Wednesday, and again on Thursday, awaiting the start of earnings season on Friday.

Within the S&P 500, financials outperformed, supported by a better-than-expected quarterly earnings report from banking giant JP Morgan on Friday. Communication services shares were also strong, boosted by a rise in Walt Disney shares after traders responded positively to the unveiling of the new Disney+ streaming service. Health care shares lagged, held down by drops in Anthem and UnitedHealth Group.

Analysts surveyed by both Thomson Reuters and FactSet expect overall earnings for the S&P 500 to have declined slightly in the first quarter versus a year earlier — a sharp contrast with the roughly 20 percent increase in profits in 2018. The roll-off of the December 2017 tax cuts on year-over-year comparisons is one factor in the decline, along with the recent slowdown in the global economy and the end of a rebound in the energy sector. Margin compression also appears to be at work. Analysts expect revenues to have grown around 5 percent versus the prior year, suggesting that firms are absorbing rising wages and other cost increases rather than passing them on to consumers.

Last week also brought news that inflation remained well contained, appearing to validate the Federal Reserve’s recent decision to hold off on further increases in official short-term interest rates. Headline inflation increased by a healthy 0.4 percent in March, but core inflation (ex-food and energy) rose only 0.1 percent in March and 2.0 percent on a year-over-year basis, its slowest pace in 13 months. The minutes from the Fed’s March policy meeting, released Wednesday, acknowledged that it was “noteworthy” that the exceptionally tight labor market had not funneled through into higher inflation.

Last week’s other economic data offered mixed signals. The market’s weakness on Tuesday seemed to be driven by some poor global growth signals, including a larger-than-expected drop in the International Monetary Fund’s global growth forecast. Weakness in Chinese auto sales also weighed on sentiment, and investors worried about threats from the Trump administration to slap tariffs on $11 billion of imports from Europe in retaliation for subsidies to Airbus. The U.S. labor market remained a standout, however. On Thursday, the Labor Department reported that weekly jobless claims had fallen to the lowest level since 1969, when the labor market was only about 60 percent of its current size.

Perhaps signaling increasing conviction in the strength of the economy, longer-term U.S. Treasury yields moved modestly higher for the week. The yield on the benchmark 10-year U.S. Treasury note closed last week at 2.56 percent.

Overseas, the STOXX Europe 600 Index lost ground during a week in which the European Union granted the UK a second Brexit extension and the European Central Bank held its benchmark refinancing rate at zero. Japanese stocks were narrowly mixed. Mainland Chinese stock markets fell last week after four straight weeks of gains and waited for a U.S.-China trade deal amid reports that both sides are closing in on a final agreement.

From the headlines…

There are also signs of green shoots from China. The government there has done just about everything to get the economy back on its feet, and the IMF recently bumped up its forecast for Chinese economic growth. Plus, the Chinese stock market has rallied impressively off its low. I never thought I’d see a Communist government cut taxes to spur growth, but here we are.

It seems that the yield curve has already backed off some. The 10-year U.S. Treasury note yield is back above the three-month-bill yield. Also, the odds of a Fed rate cut later this year have diminished. Within the next five months, the futures market thinks there’s only a 30 percent chance of a rate cut. Even that seems high to me because, this week, we got the minutes from the last Fed meeting, and members are still open to raising rates. Most think it’s a long shot, but not unthinkable. I suspect that the Fed realizes the December hike was a mistake, and for now, they’re not going to move much in either direction.

First quarter earnings season has commenced. Over the next few weeks, Corporate America will tell us how things went during the first three months of the year. This will be a key earnings season because most are expecting a modest earnings decline. Q1 will be the first time in ten years when revenues are higher but earnings are lower. In other words, margins are falling. JPMorgan Chase reported and said its profit rose 5 percent on the strength of its consumer bank, helping send U.S. stock futures higher.

The Russell 2000 index of small-cap stocks fell back below its 200-day moving average on Tuesday after briefly creeping above the long-term trend line for the third time this year. An index sustaining a rally above that line is seen as a bullish signal to market technicians. The index climbed back above the line with a 1.4% advance Wednesday.

Robust gains from the longest bull market in U.S. history have failed to solve the deep-seated problems of the nation’s public pensions. But there is a simple reason why pensions are in such rough shape: The amount owed to retirees is accelerating faster than assets on hand to pay those future obligations.

The ratio of U.S. companies that S&P Global has downgraded to the number it has upgraded this quarter is the highest on an annualized basis since 2016, the ratings agency reported this week.

Uber published the prospectus last week for its long-awaited I.P.O., revealing the full scale of its ride-hailing empire and how much money it is losing.

Chevron announced plans to acquire Anadarko, the oil and gas producer, in what would be one of the biggest deals in the industry in years.

In Amazon’s annual letter to its shareholders, Jeff Bezos shared insights about the financial performance of his e-commerce behemoth. Spoiler alert: Growth is slowing.

The dust has settled on the agreement to delay Britain’s withdrawal from the E.U. for at least six months. But reactions to the situation have been mixed. Businesses are generally unhappy. For many larger companies, Brexit has already happened. But “businesses of all sizes are still pleading for Parliament to give them clarity before the economy slows.” Economists are generally pleased. The I.M.F.’s managing director, Christine Lagarde, said that the new Brexit date meant that Britain would avoid — for now — the “terrible outcome” of a no-deal departure. The Bank of England governor, Mark Carney, said the delay would make a no-deal exit less disruptive. And Prime Minister Theresa May has “renewed her effort to push through her Brexit deal with the aid of the opposition Labour Party, in a desperate bid to avoid holding European parliamentary elections in a month’s time.”

Economists said that they see the Fed holding rates steady at least through 2021.

The new World Bank president, David Malpass, says there is too much debt in the world.

The key takeaways from Prime Minister Benjamin Netanyahu’s election victory on Tuesday.

The number of Americans filing applications for new unemployment benefits fell last week to the lowest level in nearly half a century.

Disney is preparing to launch Disney+, ending its lucrative relationship with Netflix to become a rival with a fee-based service that will stream new and old shows built around franchises from “Star Wars” to “High School Musical.”

The middle class is shrinking and its economic power diminishing in the U.S. and other rich countries.

The U.S. budget gap widened in the first half of the fiscal year as spending rose faster than revenue. The $691 billion deficit from October through March is 15 percent higher than during the same period a year earlier despite relatively strong economic growth. The Treasury estimated the full-year deficit will top $1 trillion in fiscal 2019, the first time breaching that level since 2012.

The case for international stocks.

There are black holes in space and in the derivatives market.

America’s richest states just keep getting richer.

A lackluster start of the year for the global economy has prompted the International Monetary Fund to downgrade its predictions for growth in the coming months.

Grandparents are spending approximately $179 billion on their grandkids every year.

College students are selling themselves to Wall Street.

Nearly all advisors use social media.

The Trump administration has moved toward imposing tariffs on about $11 billion in imports from the European Union. The trigger this time isn’t steel or cars. It’s airplanes.

China’s blueprint for global dominance.

Geopolitical risks, from Tripoli to Tehran, will soon push oil prices higher.

Government spending is a big unknown with respect to U.S. economic growth. The latest two-year deal to raise spending caps expires in October. If Congress doesn’t reach another, the limits enacted in 2011 would kick back in, reducing discretionary spending by $125 billion, or 10 percent, from 2019 levels.

Last week’s Barron’s cover story highlighted three investment strategists talking their books, each with his own reasons for continued optimism.

If officially nominated and confirmed, pundit Stephen Moore and former CEO and presidential candidate Herman Cain would mean that President Trump will have placed six out of 12 voting members on the Federal Open Market Committee. However, his previous nominees haven’t been like these latest two and Cain, at least, now looks unconfirmable. Most analysts don’t want a politicized Fed.

Wall Street forecasts for U.S. government bond yields are lower.

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