The WMA Weekly Market Wrap | 5/7/2019

May 9, 2019

Much Ado About (Mostly) Nothing

The major domestic stock indexes closed roughly flat last week after a Friday rally erased earlier losses. Healthcare shares outperformed within the S&P 500, while energy stocks and communication services struggled. Slower-growing value stocks handily outperforming more highly valued growth shares while small caps generally outperformed their larger cap counterparts. According to Thomson Reuters, 163 of the S&P 500 companies were to report earnings last week, making for the busiest week of the earnings season. Thomson Reuters and FactSet expect overall earnings growth for the S&P 500 to be roughly flat versus the last year, compared with an increase of about 20 percent in 2018.

Trade talks resumed in Beijing on Tuesday, but hopes for an imminent deal seem to have dampened. In any event, most are expecting a watered-down agreement if and when one is reached. The Fed’s policy-setting committee met last week and decided to make no change to official short-term interest rates, as was widely expected. The market reacted poorly to Fed Chairman Jerome Powell’s post-meeting press conference, however (see below).

Evidence that the Fed might have no need to lower rates and spur growth arrived Friday, when the Labor Department reported that employers had added 263,000 jobs in April, well above expectations. Wage growth also picked up, and the unemployment rate fell to 3.6 percent.

Friday’s jobs report fostered a sharp rise in the yield on the benchmark 10-year U.S. Treasury note, which had declined for the much of the week, to close at 2.54 percent. Government bonds generally were largely unchanged. After all the recent fuss and fear related to a (briefly) inverted yield curve, the curve has steepened dramatically of late.

In overseas trading, the pan-European STOXX 600 fell as regional economic data continued to point to eurozone slowing and Fed Chair Powell seemed to signal a rate cut is not imminent. Political uncertainty also weighed on sentiment. In Asia, mainland Chinese stocks edged higher in a shortened trading week, as traders digested the mixed signals surrounding U.S.-China trade negotiations and a few buyers stepped in after the previous week’s steep declines. Mainland markets were closed from Wednesday to Friday for the Chinese Labor Day holiday. In Japan, stock exchanges were closed for the week as part of an unprecedented 10-day market holiday to celebrate the abdication of Emperor Akihito and the ascension of Crown Prince Naruhito.

From the headlines…

Before the Fed policy meeting last week, President Trump tweeted his desire that the Fed cut interest rates by a full percentage point and resume its huge crisis-era bond-buying program. However, Fed officials agreed to hold their benchmark interest rate steady on Wednesday (text here) while noting that some key economic activity had slowed during the first quarter. The Fed’s actions made the market happy, but Fed Chairman Jerome Powell’s soon-to-come words did anything but, even though he was optimistic. There was a significant failure to communicate. Although the central bank doesn’t see a strong case today for moving rates down or up, the current low rates of inflation are seen as likely “transitory” in nature, which was a downer to those traders (an apparent majority) who were looking for a rate cut this year. In other words, a ho-hum nothing to see here Fed was not what they were after.

Overall, the economic news was decent last week. The ISM Manufacturing report for April fell to 52.8. While that’s down, it still indicates that the factory sector is growing. U.S. worker productivity improved during the past year at the best pace in nearly a decade, although that’s pretty close to the average historical rate. U.S. consumers picked up their spending in February and March. Home-price growth slowed to its lowest level in nearly seven years in February. The U.S. economy added 263,000 jobs in April, blowing past the 180,000 economists were expecting, the Labor Department announced on Friday. The unemployment rate dropped to 3.6 percent from 3.8 percent, marking a 49-year low. The U.S. is also enjoying its longest streak of private-sector job creation on record as we have now seen 103 straight months of job growth. Average hourly wages for private-sector workers grew 3.2 percent from a year earlier, matching the prior month’s increase. As the current period of growth nears the longest on record, history suggests it may have much further to run. Indeed, signs are emerging that the supply side of the economy — the workers and the tools and machines they use to produce goods and services — is becoming energized, improving the chances that faster growth can be sustained.

This earnings season, at roughly the halfway point, isn’t as bad as some had expected. About 75 percent of companies are beating expectations so far. We don’t have the full numbers in yet, but Credit Suisse had been expecting a Q1 earnings decline of 2.5 percent; they now expect to see an earnings gain of 2.5 to 3 percent.

Hedge funds have delivered subpar returns for more than a decade (see here), but a new survey finds many institutional investors are planning to stick with them because they fear another sharp market downturn is coming. In related news, just 49 percent of money managers in Barron’s spring 2019 poll say they’re bullish on stocks over the next 12 months.

The federal debt will grow to 92 percent of gross domestic product in 2029 from 78 percent in 2019, the largest projected share since 1947, according to the Congressional Budget Office, Congress’s nonpartisan scorekeeper. On the campaign trail, President Trump vowed to eliminate the national debt over a period of eight years. Two years in, the White House admits it won’t happen.

In its ongoing trade negotiations, the Trump administration is dropping its demand that China cease hacking U.S. companies to steal intellectual property, which had been central to the stated reason for a new set of deals, having called it “Chinese government-conducted, sponsored, and tolerated cyber intrusions into U.S. commercial networks.” The Pentagon says China is using espionage to steal secrets to help bulk up its military, too.

President Trump and Democratic leaders agreed on a potential infrastructure plan with a price tag of $2 trillion (with a “T”). They did not agree on how to pay for it.

Liberal Democrats’ goal of transforming the U.S. health-care system into a single, government-financed (single-payer) model would be “complicated, challenging and potentially disruptive,” the CBO warned in an analysis released last week. Even estimating a price tag is extremely difficult.

Stephen Moore, the pundit the president wanted to nominate to the Fed, could not generate support, and withdrew from consideration on Thursday, despite having stated that he wouldn’t and even though the White House had expressed its full support to Moore earlier that morning – another Trump loyalist dumped via Twitter and unhappy about it.

The Fed published a guide to monetary policy — in comic-book form.

The Alliance for Lifetime Income hired Milliman, an actuarial consulting firm, to develop the new Retirement Income Security Evaluation Score, or RISE Score (story here; RISE Score tool here).

The DOL will issue new rules on the fiduciary duties of financial advisors.

Warren Buffett’s vast conglomerate ranges over candy and carpets, railroads and running shoes. This weekend, they were all under one roof for Berkshire Hathaway’s annual meeting (“Woodstock for Capitalists”). Lots of folks played along with Berkshire Bingo. As usual, the main event was Buffett and his partner Charlie Munger answering questions. Earlier in the week, Occidental announced that Berkshire had committed to investing $10 billion to help it buy Anadarko. Berkshire is buying up Amazon stock, too. Oh, and Charlie has a side gig.

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