The WMA Weekly Market Wrap v.180515

May 15, 2018
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An Excellent Friday, A Mixed Week

Domestic stocks recorded solid gains last week, helping push all of the major benchmarks back into positive territory YTD. The S&P 500 notched its best weekly advance in two months and, on Thursday, closed above its 100-day moving average for the first time since mid-March. Financials shares were particularly strong, seemingly helped by an increase in longer-term bond yields early in the week, which offer the prospect for higher bank lending margins. Conversely, the rise in bond yields weighed on utilities shares, whose relatively high dividends became less appealing in comparison. A decrease in yields late in the week helped utilities stocks recover some ground but did not appear to derail the momentum in the financials sector.

U.S. companies are buying back their shares at a record pace, providing fresh support during what has been a rocky stretch for the stock market and many have rushed for the exits. S&P 500 companies have collectively bought $158 billion of their own stock in the first quarter, according to S&P Dow Jones Indices. That is on pace to be biggest amount in any quarter, based on data stretching back to 1998. The buybacks have been fueled in part by the new tax law that is freeing up cash and encouraging companies to bring back money held abroad. The companies that have rolled out some of the biggest buybacks are Apple, Microsoft and JPMorgan Chase, among others.

After drifting sideways early in the week, the major domestic stock indexes began moving higher on Wednesday, although traders noted that a broad catalyst for the gains seemed conspicuously absent. Rather, small bits of good news in individual sectors seemed to drive the market higher, while the final trickle of first-quarter earnings reports continued to surprise mainly to the upside. By the end of the week, data and analytics firm FactSet was anticipating that overall earnings for the S&P 500 had grown by 24.9 percent in the quarter over the year before, with nearly four out of five companies beating analysts’ earnings and revenue estimates.

A rise in domestic crude prices provided a particular boost to the energy sector. The price of a barrel of West Texas Intermediate crude hovered above $70 for much of the week, the first time it had crossed that barrier since late 2014. Saudi Arabian officials were reportedly prepared to guide international oil prices to $80 per barrel, and the potential disruption to Iranian supplies also pushed prices higher. On Tuesday, President Trump announced his intention to withdraw from the Iranian nuclear deal and re-impose sanctions on the oil-rich country, but the action was widely anticipated and did not result in a wide swing in oil prices. Having been the second-weakest segment in the S&P 500 in 2017, energy shares closed the week among the index’s best performers YTD, trailing only tech stocks.

The rise in oil prices threatened to drive gasoline costs higher for the upcoming summer driving season, but the week also brought data showing that overall consumer price inflation remained subdued. Traders appeared to react favorably late in the week to news that core (excluding food and energy) consumer prices had increased only 0.1 percent in April. In particular, the news seems to have encouraged speculation that the Federal Reserve will raise rates in only two more quarter-point increments this year versus the three that many analysts had thought was increasingly likely. The yield on the benchmark 10-year U.S. Treasury note briefly broke through the 3 percent barrier for the first time since late April but ended only modestly higher for the week, at 2.97 percent.

Key European equity indexes also ended last week higher — buoyed by rising oil prices and positive corporate news — despite political uncertainty, particularly in Italy. Trading volumes were low, and reduced volatility reflected a relatively calm market. The pan-European STOXX 600 Index ended the week up about 1.6 percent, marking its seventh straight week of advances. As the first-quarter corporate earnings season also wound down there, more European companies than usual continued to surpass earnings estimates.

European traders seem to have become less likely to bid shares up or down in tandem of late. Rather, companies that beat earnings estimates have been rewarded, while those missing estimates have seen sharp declines. The weakening U.S. dollar penalized growth in the Eurozone overall.

In Asia, trade tensions between the U.S. and China remained in the news as both sides entered a second round of trade talks in Washington to try and head off a damaging trade war. The latest bilateral trade negotiations occur as the Trump administration is reportedly finalizing a list of Chinese products that it has targeted for punitive tariffs. Consistent with the U.S. and Europe, Chinese and Japanese stocks advanced for the week.


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