Resnick Advisors Weekly Update – February 12, 2018
February 12, 2018
According to the latest Job Openings and Labor Turnover report for December, the number of job openings fell by about 167,000 from November. The number of hires in December compared to November was essentially the same at 5.5 million, as was the number of separations (5.24 million). Job openings increased in accommodation and food services, government, and information. Sectors with decreasing job openings include construction, manufacturing, retail trade, and professional and business services. Over the 12 months ended in December, hires totaled 64.7 million and separations totaled 62.6 million, yielding a net employment gain of 2.2 million.
The trade gap widened in December by $53.1 billion, according to the latest report from the Census Bureau. While exports expanded by 1.8%, imports grew by a steep 2.5%. Rising exports reflects strong global demand for domestic products and services, particularly on the heels of a falling dollar. Imports of consumer goods drove the increase on that side of the ledger, rising 6.1% in December. For 2017, the goods and services deficit increased $61.2 billion, or 12.1%, from 2016.
Growth in the non-manufacturing (services) sector expanded in January, according to the Institute for Supply Management’s non-manufacturing survey. The ISM® Non-Manufacturing Index registered 59.9%, almost 4.0 percentage points ahead of December’s reading. The index, which surveys 17 service industries such as real estate and food services, had been slowing until January’s reading. Survey respondents noted growth in new orders, employment, and prices last month.
In the week ended February 3, initial claims for unemployment insurance was 221,000, a decrease of 9,000 from the previous week’s level. The advance insured unemployment rate remained 1.4%. The advance number of those receiving unemployment insurance benefits during the week ended January 27 was 1,923,000, a decrease of 33,000 from the prior week’s level, which was revised up by 3,000.
DJIA: 24,190.90, down 5.21%
Nasdaq: 6,874.49, down 5.06%
S&P 500: 2,619.55, down 5.16%
Russell 2000: 1,477.84, down 4.49%
Global Dow: 3,016.88, down 6.15%
Fed. Funds: 1.25%-1.50%, unchanged
10-year Treasuries: 2.85%, up 2 bps
Stocks suffered their worst weekly decline in two years as investors appeared to worry about rising interest rates and elevated valuations. The major benchmarks fell largely in tandem, and all entered correction territory, off over 10% from their recent highs (the broad S&P 500 was still up over 13% from a year earlier). Still, much attention was focused on the narrow Dow Jones Industrial Average, which suffered two declines on Monday and Thursday exceeding 1,000 points, the largest in history. On a percentage basis, the declines were less imposing — according to Investor’s Business Daily, the Dow’s 4.6% drop on Monday ranked only 25th among declines since 1960. Having reached all-time lows in 2017, Wall Street’s so-called “fear index,” the Cboe Volatility Index (VIX), spiked to its highest level in several years. No sector escaped the downdraft, and traders noted that correlations — or the tendency of stocks to move in sync with each other — increased as selling pressure intensified late in the week.
A sharp rise in average hourly earnings appeared to have set off the market’s slump the previous Friday, and worries about rising wage pressures seemed to play a continuing role in the week’s declines. Thursday brought further evidence of a tightening labor market, with weekly jobless claims falling to their lowest level since January 1973, when the U.S. labor market was a little over half its current size. Much of the week’s other economic data also surprised on the upside, increasing the prospects for higher inflation and interest rates. The Institute for Supply Management’s gauge of service sector activity rose more than expected, as did wholesale inventories in December. New job openings declined a bit, however.
The prospect of increased Treasury borrowing may have also furthered fears of higher bond yields and interest rates. Traders noted that stocks suffered a rapid sell-off on Wednesday, following word that Senate leaders had reached a two-year spending deal. Despite some dissension in both parties, legislation sharply increasing both defense and other forms of discretionary spending was signed into law by President Donald Trump on Friday morning. Many expect that the extra spending, combined with recent tax cuts, will force the government to borrow over $1 trillion in the coming fiscal year, the most since the stimulus measures following the global financial crisis in 2008–2009.
Traders noted that systematic trading — or buying and selling based on algorithms and using computers — also appeared to play a large role in the market’s gyrations. The firm’s traders noted that exchange-traded funds (ETFs) were responsible for over a third of the market’s trading volume at times. Particular attention was focused on leveraged ETFs that benefit from lower volatility, which suffered steep losses as volatility spiked early in the week.
The market’s sharp decline stood in contrast to continued favorable news about corporate earnings. As the fourth-quarter earnings reporting season began to wind down, data and analytics firm FactSet raised its estimate of overall earnings growth (on a year-over-year basis) for the S&P 500 to 14.0%, marking the third quarter in the past four of double-digit gains.
Despite inflation and deficit fears, longer-term Treasury bond yields fell back slightly as investors sought government bonds and other perceived “safe havens.” (Bond prices and yields move in opposite directions.) Municipal bonds also saw gains, but the new issuance calendar was muted, and analysts noted that market volatility seemed to dampen trading in the segment.
Meanwhile, volatility in equities bled directly into the investment-grade corporate bond market. Trading was relatively balanced during the first half of the week, but market weakness seemed to later take hold across the board with increased selling, especially among riskier securities. Nevertheless, the handful of new issues that priced during the week was met with solid demand.
Stock market weakness also weighed on the performance of high yield bonds. Energy-sector issuers, which are heavily represented in the segment, suffered as oil prices fell throughout the week amid reports of rising U.S. output and an inventory buildup. New issuance volumes were light, and high yield funds experienced outflows that accelerated as the week progressed.
European stocks plunged during a week of volatility and fears about the global ramifications of a broad stock sell-off in the U.S. Early in the week, the pan-European benchmark Stoxx 600 posted its biggest one-day percentage drop since June 2016. Despite a brief respite midweek, European stocks continued to slide as the week came to a close. The UK blue chip FTSE 100 Index, whose companies earn much of their revenue from outside the UK, dropped to a one-year low, hobbled both by the global rout in equities and a weakened pound. Germany’s DAX 30 and France’s CAC 40 were also weak. Banks, utilities, and energy stocks were notable laggards.
The week was not devoid of good economic news. Quarterly corporate earnings reported during the week were largely positive. China’s demand for European imports remained strong, and French industrial production rose more than expected in its latest reading. In Germany, Chancellor Angela Merkel finally hammered out a new government coalition between her conservative alliance and the left-leaning Social Democrats. Alas, investors shrugged at the news, as the German DAX and the euro barely moved following the announcement.
The European Union is on track to continue its fastest expansion since the global economic crisis, according to economic officials for the 19-member eurozone. Gross domestic product could reach 2.3% in 2018, an increase from the 2.1% that EU officials forecast in November. The global increase in trade, relatively low inflation, and beneficial monetary policy from the European Central Bank are undergirding solid growth in the eurozone. But EU officials noted that slow wage growth and higher borrowing costs could act as weights. Uncertainty surrounding Brexit and other geopolitical tensions were also counterpoints that could dim the growth forecast.
At its meeting during the week, the Bank of England (BoE) Monetary Policy Committee voted unanimously in favor of keeping the bank rate at 0.5%. However, in its inflation report accompanying the decision, the BoE warned that to bring inflation down toward its 2% target, it may need to accelerate interest rate hikes: “The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.” UK inflation hit a five-year high of 3.1% in November but has since dropped to 3% in the latest reading. Following the BoE’s somewhat hawkish announcement, UK government bonds sold off, as some investors now expect that rate hikes could come sooner than previously anticipated.
The Japanese stock indexes resumed their declines, following the U.S. market’s lead. The widely watched Nikkei 225 Stock Average declined 8.1% (1,891 points) for the week and closed on Friday at 21,382.62. Year to date, all the major Japanese market indexes are lower: The Nikkei is down 6.1%, the broader TOPIX Index is off 4.7%, and the TOPIX Small Index has declined 6.4%. The yen strengthened and closed Friday’s trading at ¥108.8 per U.S. dollar, which is about 3.3% stronger than ¥112.7/dollar at the end of 2017.
Slow and sustainable economic growth and inflation is the Bank of Japan’s (BoJ) long-term goal. The central bank’s latest forecast for economic growth in fiscal 2018 (April 2018 through March 2019) was nudged a bit higher to a range of 1.3% to 1.5% from 1.2% to 1.4%, its October forecast. The BoJ maintained its 1.4% inflation forecast for the coming fiscal year.
Even as global yields climbed, the BoJ resolutely affirmed its conviction in maintaining an ultra-loose monetary policy stance. The policymakers offered to buy an unlimited amount of Japanese government bonds (JGBs) at a yield of 0.11%. With the yield of the 10-year JGB approaching its upper limit of the central bank’s acceptable trading band (0.10%), BoJ Governor Haruhiko Kuroda acted decisively to calm traders who speculated that the Japanese policymakers might be willing to ease back on their stimulus initiative. In Abe’s address to Parliament on Monday, the prime minister said that “a positive economic cycle is kicking off” but that he hopes “the BoJ continues to promote bold monetary easing to achieve its 2% inflation target.”
Chinese stocks ranked among the biggest losers in last week’s global stock market sell-off as domestic benchmarks in China slid more than 10% from their most recent peaks, officially entering correction territory. Both the Shanghai Composite Index and Shenzhen A-Share Index dropped roughly 15% each from their latest peaks in late January. Meanwhile, Hong Kong’s benchmark Hang Seng Index lost 9.5% for the week, its biggest weekly loss since the global financial crisis. In previous sell-offs, Chinese state-backed funds have stepped in and bought shares to stem market declines, but there was little evidence of state-led buying this time. Many analysts attributed last week’s slump to Beijing’s increased tolerance for losses as the government presses on with a campaign to wring excessive risk-taking out of the financial system.
Emerging markets stocks fell in line with the sell-off in developed markets. The MSCI Emerging Markets Index was down about 7% on the week. The flight from equities in developing markets increased as investors sold riskier assets and worried that accelerating inflation could push global interest rates higher and make it more expensive for emerging markets countries to borrow. Reuters, citing the Institute of International Finance, reported that investors have withdrawn about $4 billion from emerging markets since January 30. The majority of those outflows came from South Korea, Indonesia, and Thailand. During the week, the South Korean Kospi index lost 6.4%. Indonesia’s Jakarta Stock Exchange and Thailand’s SET Index were both down about 2%.
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.