A New World of Volatility
Domestic stocks recorded solid gains last week and reversed the previous week’s losses. Markets remained volatile, however, as traders appeared to remain focused on the turbulent political environment rather than the upcoming release of first-quarter corporate earnings reports. The tech-heavy Nasdaq performed best, helped by a rally in Facebook shares as traders seemed to react favorably to Facebook CEO Mark Zuckerberg’s testimony before Congress on Tuesday and Wednesday. While tech shares performed well, energy stocks led the gains in the S&P 500, helped by a rally in crude prices to their highest level since late 2014. For the first time in many years a small geopolitical risk premium seems imbedded in oil prices. Real estate and utilities shares lagged as longer-term bond yields increased, making their relatively high dividends less appealing in comparison.
Concerns over growing trade tensions with China continued to weigh on sentiment, although traders appeared to grow more optimistic that a full-scale trade war involving the world’s two largest economies would be averted as the week progressed. Stocks rose at the start of trading on Monday, helped by President Donald Trump’s somewhat softer stance on trade issues over the weekend. Chinese President Xi Jinping provided another boost to sentiment later in the week after he repeated a vow to ease access to sectors ranging from banking to auto manufacturing and to protect intellectual property in a “new phase of opening up.”
Even as the trade backdrop brightened a bit, new geopolitical clouds darkened the horizon. Stocks fell sharply in early trading Tuesday, following a tweet from President Trump threatening a missile strike on Syria in response to the Assad regime’s apparent chemical attack on dissident areas the previous weekend. Traders also appeared to be unsettled by tweets from the President attacking the Mueller investigation following the FBI’s seizure of documents from his personal attorney and “fixer,” Michael Cohen. Stocks rallied on Thursday after the President appeared to calm tensions on both fronts, tweeting that a Syria strike might not be imminent and that he would have already fired Mueller if he were planning to do so. Reports also surfaced on Thursday that the President was considering having the U.S. re-enter the Trans-Pacific Partnership, a multilateral trade agreement that could offer lower trade barriers to U.S. exporters, despite having recently withdrawn from it, which was seen as very good news.
Friday brought the release of the first major first-quarter earnings reports, with JPMorgan Chase, Wells Fargo, and Citigroup all declining in early trading despite topping analysts’ estimates. Due in part to recent corporate tax cuts, expectations for first-quarter profit growth are high, with analysts polled by FactSet anticipating that earnings for the S&P 500 as a whole will rise more than 17 percent on a year-over-year basis. If realized, this would be the strongest earnings performance since 2011, also per FactSet. Note, however, that the impact of the tax cuts on year-over-year earnings comparisons will inevitably be temporary.
Early Saturday brought the expected but discounted air strikes on Syria by American, British and French forces. This may now be a key driver of market action going forward, especially if more strikes are forthcoming. Early futures trading after the strikes on Saturday were sharply negative, but it of course remains to be seen how price action develops when full-on trading returns on Monday.
Longer-term bond yields increased last week, with much of the move coming on Thursday, after the release of data showing a drop in weekly jobless claims. Last week’s claims came in under 300,000 for a record 162nd consecutive week, the longest such stretch on record dating back to 1967. Given that streak, some are perplexed that wage gains remain muted. One possible reason for the lack of wage pressure is the labor participation rate of 62.9 percent, considerably lower than the 35-year average of 65.5 percent, which peaked in January 2000 at 67.3 percent.
The minutes from the latest Federal Reserve policy meeting did not seem to have a significant impact on markets despite confirming that Fed officials were contemplating a slightly faster pace of rate hikes as they grew increasingly confident that the inflation rate was moving up toward their 2 percent target. Most analysts continue to believe that the Fed will raise rates at least two more times in 2018, with a third hike possible.
With geopolitical tensions in focus, European stock markets also ended last week higher as the start of earnings season and positive economic news countered some investor reluctance about the relative attractiveness of equity markets. Still, trading volumes were generally low, as traders seemed more comfortable sitting on the sidelines. As in the U.S., concerns about the prospects of a trade war or the ramifications of a military confrontation centered on Syria ebbed as the week progressed.
The pan-European STOXX 600 Index advanced around 1 percent for the week. Germany’s exporter-heavy DAX 30 also rose for the week, despite news that the country’s exports plunged in February, largely due to a strengthening euro. German markets were supported by news that consumer price inflation accelerated in March, and they were also lifted by a report that China’s imports increased in the latest period. The UK blue-chip benchmark, the FTSE 100 Index, also rose about 1 percent, but the index has been underperforming its European counterparts largely due to the strong pound, which weighs on the companies that convert non-UK profits back into the sterling. Benchmark indexes in Spain, France, and Italy also ended the week higher.
In Asia, Chinese stocks advanced last week as the easing of trade-related tensions between the U.S. and China was good news there too, even as both sides struggled to reach a resolution. As noted above, China’s President Xi Jinping pledged to increase market access for foreign financial services companies and to relax foreign investment restrictions in other sectors. In Japan, large-cap stocks posted gains, but small-caps were little changed for the week.
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