The WMA Weekly Market Wrap v.180313

March 13, 2018

Stocks Back in the Black

Domestic stocks rebounded from the previous week’s losses, bringing all the major indexes back into positive territory YTD. The tech-heavy Nasdaq fared best and managed to set a new intraday high on Friday, following another strong jobs number. The small-cap Russell 2000 also performed especially well. Along with information technology shares, financials, industrials and business services, and materials shares led the S&P 500’s gains, while utilities stocks lagged.

Traders faced multiple crosswinds last week. The economic environment appeared to be the most prominent tailwind, with stocks recording their biggest gains for the week following the release of the Labor Department’s closely watched employment survey on Friday. The U.S. economy added 313,000 jobs in February, a much stronger number than economists expected and the biggest gain since July 2016. In the first two months of the year, the United States has already added more than half a million jobs. February also marked the 89th consecutive month of job gains, the longest streak since the government began keeping track in the 1940s. The unemployment rate held steady at 4.1 percent, the lowest level in 17 years, for the fifth consecutive month. Wages grew 2.6 percent YOY, a few notches below the pace in January. More modest wage growth should help to cool fears about inflation and rising interest rates, both of which spooked the markets last month. The initial wage growth figure from January was revised down a bit, too. This news pushed stocks higher and bonds lower.

M&A news also seemed to push markets forward last week. On Monday, the financials sector got a boost from news that French multinational insurance giant AXA was acquiring XL Group for $15.3 billion. Thursday brought news of an even bigger deal in the health care sector, with health insurer Cigna announcing a deal to buy pharmacy benefits provider Express Scripts for $54 billion, a 30 percent premium to the latter’s trading price before the announcement. Many traders expect a pickup in U.S. merger activity as companies deploy savings from recent tax reform and repatriate profits held overseas.

Last week’s gains would likely have been even stronger if not for the week’s major headwind — concerns that new tariffs on steel and aluminum imports might lead to a broader trade war. Kicking his “America First” trade policy into high gear and despite criticism from virtually all economists, President Trump signed orders Thursday implementing global tariffs on steel and aluminum while signaling more aggressive pressure on trading partners to come, especially China.

In a surprise move, after originally emphasizing that no countries would be exempt from the 25 percent tariff on steel or the 10 percent aluminum tariff, the president backed down and excluded Mexico and Canada from the tariffs and allowed for the possibility that other countries could also be spared for national security reasons. Moreover, his official proclamations also offer some workarounds for companies. For example, under the new rules, an importer can ask the Commerce Department for a waiver if there’s a limited supply of the product in the U.S. or if national security is at stake. Accordingly, aluminum can makers, pipeline builders and car companies are already building their cases for why the tariffs shouldn’t apply to them. These actions eased market fears, and set the stage for the jobs-number rally on Friday.

Also last week, President Trump accepted an invitation to meet with North Korean leader Kim Jong Un, a meeting that would mark the first time a serving U.S. president sat down with the isolated country’s leadership. U.S. officials said the meeting would take place within the next “couple of months” at a location yet to be determined. By all accounts, the obstacles to an agreement are formidable. However, it seems that President Trump believes to his core that his singular charisma and “talent” (a word he uses so often) can solve the world’s most intractable problems. There doesn’t seem to be any consensus about what this news means for markets.

The major European equity indexes ended last week firmly in positive territory too, as traders seemed to shrug off the various geopolitical uncertainties. One notable exception was Germany’s DAX 30, which ended the week lower. Germany is a heavy exporter of steel products, automobiles, and machinery and is particularly exposed to the new tariffs. The Italian election that was held the previous weekend featured gains for anti-establishment parties and resulted in a hung parliament in which no single party or alliance won enough seats to easily form a coalition government. Nevertheless, traders kept Italy’s benchmark FTSE MIB Index in positive territory last week. The pan-European index STOXX 600, the UK’s FTSE 100, and France’s CAC 40 also moved higher.

After news broke that the White House had accepted North Korean leader Kim Jong Un’s invitation to meet, Asian shares rallied to close the week higher, capping a volatile week of trading. South Korea’s KOSPI Index rose more than 2 percent, and the Hong Kong Hang Seng Index made a U-turn and finished up more than 1 percent. The yen slid over 1 percent against the U.S. dollar as investors sold safe havens, and credit default swaps on South Korean sovereign bonds fell the most since November 2016.

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