Resnick Advisors Weekly Update – April 2, 2018
April 2, 2018
Gross domestic product increased at an annual rate of 2.9% in the fourth quarter of 2017, according to the third and final estimate released by the Bureau of Economic Analysis. GDP increased 3.2% in the third quarter.
Personal (pre-tax) income and disposable (after-tax) personal income increased 0.4% in February. Of particular note, wages and salaries increased 0.5% over January. Personal consumption expenditures, which measures how much consumers are spending for goods and services, jumped 0.2% in February, matching January’s increase. Of that total, purchases of durable goods rose by 0.2%, while services climbed 0.3%. The prices paid by consumers for goods and services, as measured by the PCE price index and core PCE price index (excluding food and energy) each increased by 0.2% in February. While consumer prices for goods and services rose a bit in February, consumer spending remained somewhat subdued. Consumer saving, as expected, increased 0.2% to 3.4%.
The international trade deficit increased by $0.1 billion in February to $75.4 billion. Exports expanded by $2.9 billion (2.2%), while imports increased by $3.0 billion (1.4%).
Consumers lost a little faith in the economy in March, according to the latest report from The Conference Board. The Consumer Confidence Index® fell to 127.7 in March after reaching an 18-year high of 130.0 in February. Consumers’ confidence waned in their assessment of present economic conditions as well as short-term economic growth.
In the week ended March 24, there were 215,000 initial claims for unemployment insurance, a decrease of 12,000 from the previous week’s level, which was revised down by 2,000. This is the lowest level for initial claims since January 27, 1973, when it was 214,000. The advance insured unemployment rate remained at 1.3% for the week ended March 17. The advance number of those receiving unemployment insurance benefits during the week ended March 17 was 1,871,000, an increase of 35,000 from the prior week’s level, which was revised up by 8,000.
DJIA: 24,103.11, up 2.42%
Nasdaq: 7,063.44, up 1.01%
S&P 500: 2,640.87, up 2.03%
Russell 2000: 1,529.43, up 1.28%
Global Dow: 3,026.70, up 1.27%
Fed. Funds: 1.50%-1.75%, unchanged
10-year Treasuries: 2.73%, down 8 bps
Stocks recovered a portion of the previous week’s steep losses and recorded solid gains. The week was notable for a sell-off in high-valuation technology companies, however, which caused the Nasdaq Composite to lag the other benchmarks. A steep drop in Amazon.com caused the consumer discretionary sector to join technology and energy stocks among the week’s laggards in the Standard & Poor’s 500 Index. Typically defensive consumer staples stocks performed well, on the other hand, as did real estate and utilities shares, whose heavy dividends became more attractive as long-term bond yields decreased. The market is closed on March 30 for the Good Friday holiday.
The week got off to a very strong start as the trade war fears that led to much of the previous week’s volatility appeared to fade somewhat. According to traders, investors were encouraged by China’s decision — for the time being, at least — not to establish retaliatory tariffs on its imports of U.S. soybeans and commercial aircraft. Reports of talks between Chinese and U.S. officials on opening the Chinese market to U.S. goods and protecting U.S. firms’ intellectual property rights were also encouraging (see below). Monday saw the S&P 500 Index notch its best daily gain since August 2015, but the firm’s traders noted that trading volumes were somewhat disappointing, perhaps indicating a lack of broad conviction in the rally.
The market gave back a good portion of its gains on Tuesday with a late-day sell-off in the technology sector. The primary culprit appeared to be a report that the Trump administration was considering a crackdown in Chinese investments in U.S. firms with technologies deemed necessary to national security. Speculation has grown that the administration is pushing back against the Chinese government’s plans to dominate emerging technologies and industries, such as artificial intelligence.
Other factors also contributed to volatility in technology-related shares throughout the week. Worries about the safety of self-driving cars following a fatal pedestrian accident the previous week caused semiconductor maker Nvidia to announce that it was suspending its own experiments with the technology, leading to a sharp drop in the shares of one of 2017’s top market performers. Tesla shares also sank as investors reacted to a fatal crash in one its cars, although it remained unclear whether the vehicle’s self-driving mode had been engaged at the time.
Meanwhile, controversy over the use of customer data continued to weigh on Facebook shares, particularly after the announcement of a Federal Trade Commission investigation into the issue — a contagion that seemed to spread to Twitter. Amazon shares suffered from worries about antitrust or other regulatory action against the company following a report on Wednesday that President Trump was “obsessed” with the company. Technology shares got some relief on Thursday, as Microsoft stock rose following reports of a coming reorganization at the company.
Volatility in stocks seemed to cause investors to seek a haven in the U.S. Treasury market, where the yield on the benchmark 10-year note reached its lowest level since early February. (Bond prices and yields move in opposite directions.) Municipal bonds produced marginally positive returns for the week but underperformed Treasuries. Muni trading activity was initially subdued, reflecting the light new issuance calendar, but increased slightly as the week progressed, with investors seeking out longer-term municipal bonds. Analysts noted that lower-quality debt continued to do well as subdued new issuance led to impatience on the part of yield-seeking investors.
The partial recovery in stock prices bolstered sentiment in the investment-grade corporate bond market, where new deals were generally met with strong interest, and dealer inventories steadily declined throughout the week. The relief rally in equities did not carry over to the high yield bond market, however. Although primary and secondary market trading picked up as the week progressed, performance of the asset class was mostly flat. The firm’s traders observed that the recent volatility has caused somewhat of a backlog of new deals as many issuers appeared to be delaying coming to market.
The leading European stock indexes regained some ground for the week but finished the month and the first quarter with losses. The UK blue chip FTSE 100 index led the way, picking up just over 2% heading into the four-day Easter weekend (European markets are closed on Good Friday and Easter Monday), while the pan-European STOXX 600, German DAX, and French CAC 40 each added more than 1%. Traders noted that a reduction in concerns about a global trade war helped fuel the recovery.
Some stock-specific stories also helped drive markets higher. Shares of pharmaceutical companies GlaxoSmithKline and Novartis rose on news that Glaxo was buying out Novartis’ stake in their consumer health care joint venture. Also, French automaker Renault rallied on reports that it was participating in merger talks with Nissan.
Eurozone government bond yields generally declined for the week, tracking U.S. Treasury interest rates. The yield on the 10-year German government bond fell below 0.5% for the first time since January, and Spanish government bond yields fell and prices rallied as ratings agency S&P upgraded the country’s sovereign credit rating.
Japanese stocks gained in the four days ended March 29, recovering some of their losses from the previous week. The Nikkei 225 Stock Average climbed 2.6% in the four trading days. However, all of the major Japanese market indexes remained substantially in the red for the year to date. The Nikkei was off 7.1%, the broad-based TOPIX Index was down 6.3%, and the TOPIX Small Index had declined 5.7%. The yen strengthened and closed Thursday’s trading at ¥106.44 per U.S. dollar, which is about 5.6% stronger than the ¥112.7 per dollar level 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.