Resnick Advisors Weekly Update – March 12, 2018
March 12, 2018
February saw 313,000 new jobs added, according to the latest employment report from the Bureau of Labor Statistics. Notable job gains occurred in construction (61,000), retail trade (50,000), professional and business services (50,000), and manufacturing (31,000). The unemployment rate remained at 4.1% for the fifth consecutive month. The average workweek for all employees rose by 0.1 hour to 34.5 hours in February. Average hourly earnings for all employees rose by $0.04 to $26.75, following a $0.07 gain in January. Over the year, average hourly earnings have increased by $0.68, or 2.6%. Overall, the number of significant new jobs added is a positive, while wages increased by only 0.1% for the month. The year-over-year gain slowed in February (2.6%) compared to January (2.9%), which was the largest gain since 2009. This should be positive news for investors who shunned the market for fear of rising inflation and interest rates.
The non-manufacturing (services) sector of the economy expanded in February, but at a slightly slower pace than the previous month, according to the latest report from the Institute for Supply Management. Supply managers indicated that manufacturing business activity, and new orders expanded, while employment and prices decreased last month. According to the report, the majority of respondents remain positive about business conditions and the economy.
A report that could bolster President Trump’s trade policy of increasing tariffs on imports, January’s goods and services trade deficit expanded sharply to $56.6 billion, up $2.7 billion from the $53.9 billion December revised deficit. In January, exports narrowed by $2.7 billion, while imports remained relatively the same, down less than $0.1 billion from December’s imports. Year-over-year, the goods and services deficit increased $7.9 billion, or 16.2%, from January 2017. Exports increased $9.7 billion, or 5.1%. Imports increased $17.6 billion, or 7.4%.
In the week ended March 3, there were 231,000 initial claims for unemployment insurance, an increase of 21,000 from the previous week’s level. The advance insured unemployment rate dipped to 1.3% for the week ended February 24. The advance number of those receiving unemployment insurance benefits during the week ended February 24 was 1,870,000, a decrease of 64,000 from the prior week’s level, which was revised up by 3,000.
DJIA: 25,335.74, up 3.25%
Nasdaq: 7,560.81, up 4.17%
S&P 500: 2,786.57, up 3.54%
Russell 2000: 1,597.14, up 4.17%
Global Dow: 3,143.16, up 2.53%
Fed. Funds: 1.25%-1.50%, unchanged
10-year Treasuries: 2.89%, up 3 bps
Stocks rebounded from the previous week’s losses, bringing all of the major indexes back into positive territory for the year to date. The technology-heavy Nasdaq Composite Index fared best and managed to set a new intraday high on Friday. The small-cap Russell 2000 Index also performed especially well. Along with information technology shares, financials, industrials and business services, and materials shares led the S&P 500 Index’s gains, while utilities stocks lagged.
Investors faced a number of crosswinds during the week. The economic environment appeared to be the most prominent tailwind, with stocks recording their biggest gains for the week on Friday, following the release of the Labor Department’s closely watched employment survey. The report revealed that employers had added more jobs than expected in February, along with upward revisions to previous months’ gains. More significant for the markets, however, seemed to be a slowdown in the growth of average hourly earnings, from a year-over-year pace of 2.8% in January to 2.6% in February.
Investors seemed to be relieved that the data showed an easing in wage inflation pressures, but T. Rowe Price Chief U.S. Economist Alan Levenson observes that an increase in the average hourly workweek magnifies the implications of more workers earning slightly more per hour. Indeed, he calculates that aggregate labor income is currently growing at an annual rate of roughly 5%, suggesting healthy growth in consumer spending even as consumers rebuild savings. Nevertheless, Levenson does not expect the Federal Reserve to break with its gradual path of rate increases unless policymakers see clearer signs of a breakout in wage inflation or a meaningful acceleration in employment growth.
News of important mergers and acquisitions also seemed to push markets forward. 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% premium to the latter’s trading price before the announcement. Many investors expect a pickup in U.S. merger activity as companies deploy savings from recent tax reform and repatriate profits held overseas.
Gains might 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. Traders noted that trade worries seemed to fade a bit at the beginning of the week. European and Asian nations did not announce retaliatory measures over the previous weekend, as some had feared, and President Trump tweeted that Mexico and Canada would be exempt “if a new & fair NAFTA agreement is signed.”
Investors also appeared to be encouraged by news that Trump’s top economic advisor Gary Cohn was assembling a group of executives whose companies use imported metals to come to the White House and argue against the tariffs. These hopes were sorely disappointed on Tuesday evening, when word arrived that Cohn would instead be leaving the White House. Stocks fell sharply in futures trading but recovered from initial losses on Wednesday as investors seemed to focus on the potential for “carve outs” from the tariffs for certain countries. Indeed, the tariffs announced Thursday afternoon temporarily exempted Canada and Mexico, and President Trump suggested that other favored trading partners might also excluded.
The generally strong jobs report caused a jump in longer-term bond yields, which ended higher for the week. (Bond yields and prices move in opposite directions.) Municipal bonds kept pace with Treasuries, with light issuance in the primary market balanced by higher activity in the secondary market, particularly in higher-grade munis.
The investment-grade (IG) corporate bond market was mostly focused on a highly anticipated deal from CVS Health to fund its purchase of Aetna. The $40 billion issuance was the third-largest IG corporate bond deal on record. Overall, the bonds received strong interest in both the primary and secondary markets, and traders noted that there was heavy selling elsewhere in the sector to fund purchases. Improved equity performance was supportive for high yield bonds. A number of issuers came to the market with deals that were mostly well received. However, energy credits came under pressure as oil prices fell amid reports of growing U.S. stockpiles and increased domestic production. Overall, high yield funds reported outflows for the week.
Major European indexes ended the week firmly in positive territory, as investors seemed to shrug off geopolitical uncertainties — notably, the possibility of heightened trade frictions with the U.S. 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, investors kept Italy’s benchmark FTSE MIB Index in positive territory for the week. The pan-European index STOXX 600, the UK’s FTSE 100, and France’s CAC 40 were also higher for the week.
The large-cap Japanese stock indexes ended higher after a volatile week. The Nikkei 225 Stock Average gained 1.4% and closed on Friday at 21,469.20. However, all of the major Japanese market indexes remained underwater for the year to date. The Nikkei and the broad-based, large-cap TOPIX are down 5.7%, and the TOPIX Small Index, which was about flat for the week, is off 5.4%. The yen weakened and closed Friday’s trading at ¥106.85 per U.S. dollar, which is stronger than ¥112.7 per dollar at the end of 2017.
Portions of the preceding information are reprinted with permission from Broadridge Investor Communication Solutions, Inc. Copyright 2018. Portions of the preceding information are shared from T. Rowe Price Weekly Market Wrap-Up.