Resnick Advisors Weekly Update – March 5, 2018
March 5, 2018
The net value of goods and services produced in the United States, as measured by the gross domestic product, increased at an annual rate of 2.5% in the fourth quarter of 2017, according to the second estimate released by the Bureau of Economic Analysis. In the third quarter, the GDP increased by 3.2%. The price index for gross domestic purchases (a measure of price changes in goods and services) increased 2.5% in the fourth quarter, compared with an increase of 1.7% in the third quarter. The personal consumption expenditures price index (which measures the increase in prices paid for personal consumption) increased 2.7%, compared with an increase of 1.5%. Excluding food and energy prices, the PCE price index increased 1.9%, compared with an increase of 1.3%. Consumer spending increased 3.8% compared to the third quarter, as purchases of durable goods jumped 13.8%.
Personal (pre-tax) earnings rose 0.4% in January, the same increase as December, according to the latest report from the Bureau of Economic Analysis. After-tax income surged ahead by 0.9%, which matches the largest such gain since December 2012, reflective of the tax-law changes taking effect in January. Despite increased income, consumers didn’t spend significantly more, as personal consumption expenditures rose by only 0.2% over December’s rate. Instead of spending, consumers apparently added their newfound income to savings, which jumped 3.2% in January.
Manufacturing output expanded in February, but at a slightly slower pace than January, according to the IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™). The PMI™ registered 55.3 in February, down slightly from 55.5 in January. The advance in production was attributable to greater client demand. New business expanded at a faster pace, while input prices increased at the fastest pace since December 2012.
The Institute for Supply Management’s Report On Business® reported similar results as Markit’s submission. The ISM® Purchasing Managers’ Index registered 60.8% in February, an increase of 1.7 percentage points from the January reading. However, ISM® respondents reported a slight decrease in new orders and production. Employment increased substantially, as did prices.
New home sales fell 7.8% in January and 1.0% below their pace from a year ago. The median sales price of new homes sold in January was $323,000. The average sales price was $382,700. The seasonally adjusted estimate of new houses for sale at the end of January was 301,000. This represents a supply of 6.1 months at the current sales rate. While new home sales were soft in January, inventory increased 10.9% and the average sales price fell 3.1% — factors which should help spur sales in February.
Orders for long-lasting products (durable goods) slipped in January, according to the latest report from the Census Bureau. New orders decreased $9.2 billion, or 3.7%, for the month following two consecutive monthly increases. Unfilled orders, down following four consecutive monthly increases, decreased $3.1 billion, or 0.3%, to $1,140.9 billion. On the plus side of the report, both shipments ($0.6 billion, or 0.2%) and inventories ($1.3 billion, or 0.3%) increased in January over December.
The Conference Board Consumer Confidence Index® increased in February, following a modest increase in January. Coming in at 130.8, this is the highest level since November 2000. According to the report, “despite the recent stock market volatility, consumers expressed greater optimism about short-term prospects for business and labor market conditions, as well as their financial prospects.”
In the week ended February 24, there were 210,000 initial claims for unemployment insurance, a decrease of 10,000 from the previous week’s level, which was revised down by 2,000. This is the lowest level for initial claims since December 6, 1969, when it was 202,000. The advance insured unemployment rate inched up to 1.4% for the week ended February 17. The advance number of those receiving unemployment insurance benefits during the week ended February 17 was 1,931,000, an increase of 57,000 from the prior week’s level, which was revised down by 1,000.
DJIA: 24,538.06, down 3.05%
Nasdaq: 7,257.87, down 1.08%
S&P 500: 2,691.25, down 2.04%
Russell 2000: 1,533.17, down 1.03%
Global Dow: 3,065.64, down 2.74%
Fed. Funds: 1.25%-1.50%, unchanged
10-year Treasuries: 2.86%, unchanged
Stocks recorded sharp losses for the week. Information technology and consumer staples shares held up best in the S&P 500 Index, while industrials and business services shares fared worst. A decline in industrials giant Caterpillar weighed especially on the narrowly focused Dow Jones Industrial Average, while the smaller-cap benchmarks and the technology-heavy Nasdaq Composite Index fared best.
The week started out on a strong note, although on light trading volumes. Traders noted that there did not seem to a single catalyst behind the gains, but rather an overall sense that the factors that drove the market higher in recent months — including global economic strength, strong earnings growth, and enthusiasm over tax cuts — would help stocks recover from recent volatility.
Market participants also observed that a spike in interest rates remained the biggest threat overhanging the market, however, and stocks headed sharply lower again on Tuesday as rate fears re-emerged. In testimony before the House Financial Services Committee, Federal Reserve Chair Jerome Powell said that he and fellow policymakers were “going to be taking the developments since the December meeting into account and writing down our new rate paths.” Some interpreted the remark to imply that recent strong economic and inflation data would prompt the Fed to raise rates four times in 2018, versus the three hikes previously expected.
Inflation and rate fears calmed a bit on Wednesday morning following the release of revised data from the Commerce Department that showed that the economy had grown a bit less than previously estimated in the final quarter of 2017. Stocks rose on the news but then fell back sharply in late trading, which the traders attributed to month-end selling pressures. On Thursday, Fed Chair Powell took his turn before the Senate Banking Committee, this time striking a more dovish tone, according to observers. However, Powell’s reassurances may have been offset by remarks from Federal Reserve Bank of New York President William Dudley, who said in a speech that he would characterize four rate hikes this year as “gradual.”
Worries over heightened trade frictions also seemed to drag down shares late in the week. According to traders, rumors that President Trump would announce a new round of tariffs weighed on sentiment as early as Monday, but most investors were taken by surprise when the president announced on Thursday afternoon that he would institute tariffs on steel imports and aluminum imports. Shares in steel and aluminum makers jumped on the news, but the stocks of automakers and other heavy steel users fell. Industrial exporters such as Caterpillar were dealt a double blow, facing the threat of both higher input costs and retaliation against their products in overseas markets.
The market’s declines continued in futures trading Friday morning after the president tweeted that “when a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.” European Commission President Jean-Claude Juncker fired back the first salvo Friday afternoon, announcing plans to raise tariffs on imports of U.S. whiskey, motorcycles, and blue jeans. Stocks finished the week off their Friday morning lows, however, led by small-caps, which are typically less reliant on overseas sales.
Interestingly, the threat of a trade war seemed to have a more durable effect on the bond market. After declining for much of the week, the yield on the 10-year Treasury note bounced following the president’s tweets, seemingly due to fears that heightened prices for steel and aluminum — and perhaps more goods to come — would feed through into higher inflation. (Bond prices and yields move in opposite directions.) Municipals underperformed U.S. Treasuries as buyers remained cautious, according to analysts. However, the secondary market picked up a bit, as flows into funds seemed to turn positive again after a slight negative turn in the preceding weeks.
European stocks ended the week lower amid subdued trading volumes, lackluster economic news, and fears about a brewing trade war following President Donald Trump’s announcement of tariffs on steel and aluminum. Both the pan-European STOXX 600 and the German DAX 30 fell just over 2%. The UK’s blue chip FTSE 100 fared slightly better but still posted a decline of just over 1%. FTSE 100 shares were weak following UK Prime Minister Theresa May’s rejection of the European Union Brexit treaty draft.
The major Japanese stock market benchmarks fell for the week. The bellwether Nikkei 225 Stock Average ended the week at 21,181.64, a loss of 3.25% (711 points) versus the prior week. The Nikkei average has lost 6.95% (1,583 points) since the beginning of 2018. The large-cap TOPIX Index fell 2.96% (52 points) for the week and has declined 6.01% (109 points) for the year to date. The TOPIX Small Index declined 2.57% (61 points) versus last week’s close, and it is down 5.26% (128 points) from the start of the year. The yen closed the week at 105.41 versus the U.S. dollar, a slight decrease of 1.08% versus the prior week. The yen has lost 6.34% against the dollar so far in 2018.
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.