Market Commentary

Financial Markets Commentary For the week of March 05, 2018

Key Market Data

02/23/2018 03/02/2018 One Week Change YTD One Year
S&P 500 Index 2,747.30 2,691.25 -2.04% +1.00% +15.22%
MSCI EAFE Index 2,065.21 2,005.08 -2.91% -1.93% +17.61%
Barclays Capital U.S. Aggregate Bond Index 2,002.87 2,003.27 +0.02% -2.11% +1.19%
10-year Treasury Note Rate 2.868% 2.865% -0.3 basis points +45.9 basis points +38.6 basis points

Investors who have recently been leery about rising inflation and higher interest rates added a new concern to their list last week, and a new cause for the continuing stock market volatility: a trade war.

How volatile was it? Well, the Dow Jones Industrial Average (the Dow) rose or fell an average of 314 points in five days of trading on its way to falling back into the red for 2018. And while the S&P 500 and Nasdaq are still up for the year, February was the market’s worst month since 2016, with the S&P 500, which had been up for fifteen months in a row (including dividends), down 3.7 percent, the Dow off 4.0 percent, and the Nasdaq losing 1.7 percent.

On Thursday, President Donald Trump announced that he was ready to make good on one of his central campaign promises, protecting America from cheap imports by putting in place tariffs on steel and aluminum of 25 percent and 10 percent, respectively, this coming week. He said the tariffs would be in effect “for a long period of time,” and, when he was asked about triggering a trade war, he tweeted, “trade wars are good, and easy to win.”

While the steel and aluminum industries applauded the step, the response from other quarters ranged from cautious to combative, even from the president’s fellow Republicans. For instance, Senator Pat Roberts (R, Kansas) warned, “Every time you do this, you get a retaliation,” and Senator Mike Lee (R, Utah) described the proposed tariffs as “a huge, job-killing tax hike.” A Wall Street Journal editorial dubbed the step “the biggest policy blunder of his presidency” because threatened retaliation by trading partners would hurt other industries that rely on steel and aluminum, such as auto manufacturing, construction and packaging. The European Commission’s (EC) President Jean-Claude Juncker called the tariffs “a blatant intervention” and said the EC would not “sit idly by while our industry is hit with unfair measures that put thousands of European jobs at risk.” Roberto Azevȇdo, director general of the World Trade Organization, said “the potential for escalation is real,” adding, “a trade war is in no one’s interest.” And Canada’s Prime Minister Justin Trudeau, while more circumspect, nonetheless warned of the move’s “significant and serious” impact on North America’s economy” – Canada is the leading exporter of steel to the United States, followed by Brazil and South Korea (Russia is fifth, and China eleventh). On Sunday, Trump responded to the EC’s threat, saying that if it raised tariffs on American goods, he would in turn raise the tariff on European cars.

Powell speaks, and a new vice chairman is in the offing

Earlier last week, stocks were down because of the testimony of Jerome Powell, the new chairman of the Federal Reserve, before the House Financial Services Committee on Tuesday. Powell said, “My personal outlook for the economy has strengthened since December,” adding, “I would expect the next two years on the current path to be good years for the economy.” This led some investors to think the Federal Reserve Bank of New York’s (the Fed) will raise its rate four times this year rather than three, sending stocks down. He also said the Fed would avoid an “overheated economy” and keep an eye on inflation, which has long remained below its target of 2 percent. Powell also reiterated his intentions to loosen bank regulations “without losing any safety or soundness.” Thursday, he appeared before the Senate Committee on Banking and reaffirmed his messages. On another Fed note, Trump is expected this week to nominate Richard Clarida to be Powell’s vice chairman. Clarida, a Republican, is a professor of economics at Columbia University and a managing director at the Pacific Investment Management Company (PIMCO).

A concession from May; a fourth term for Merkel

With the deadline for leaving the European Union (EU) a year away, Britain’s Prime Minister Theresa May admitted that the post-Brexit outlook is not as rosy as she once asserted. In a speech to lawmakers on Friday, she said, “The reality is that we all need to face up to some hard facts,” including less trade with the EU. “This is negotiation,” she said, adding, “No one can have exactly what they want.” And almost six months after her party failed to win a parliamentary majority, Angela Merkel will return as Germany’s chancellor as on Sunday the membership of the Social Democratic Party approved a ruling coalition with her Christian Democratic Union.

In other news, the government revised its estimate for fourth-quarter GDP down to 2.5 percent from 2.6 percent, and the Federal Reserve of Atlanta forecast growth of 2.6 percent for the current quarter. The Institute for Supply Management’s Manufacturing Index improved from 59.1 percent in January to 60.8 percent in February, the strongest reading since 2004, and the Employment Index jumped from 54.2 percent to 59.7 percent. Two surveys of consumer confidence indicated that Americans remain upbeat about the economy: The Conference Board’s consumer confidence hit its highest level since November 2000 in February, rising to 130.8 from January’s 124.3; and the University of Michigan said its Consumer Sentiment Index rose to 99.7 in February from 95.7 in January, the second best reading since 2004. New home sales fell 7.8 percent to an annualized rate of 593,000 in January from the month before, following a decline of 7.6 percent in December, and sales were off 1 percent from January 2017. However, the S&P CoreLogic Case-Shiller National Home Price Index was up 6.3 percent in November from a year earlier and increased 0.2 percent from the month before. Pending home sales dipped 4.7 percent in January and were down 1.7 percent from a year earlier. Retail inventories were up 0.8 percent in January from December. As for the latest data on inflation, personal consumption expenditures rose 0.4 percent in January and 1.7 percent over the past year. Excluding food and energy, Personal Consumption Expenditures (PCE) was up 0.3 percent month over month and 1.5 percent year over year. And first-time jobless claims for the week ending Feb. 24 fell 10,000 to 210,000, while the four-week moving average declined 5,000 to 220,500 – both figures were the lowest totals since late 1969.

A look ahead

In addition to the official rollout of the president’s tariff plan, this week there will be updates on the Institute for Supply Management Non-Manufacturing Index, nonfarm productivity, the trade balance, consumer credit, the Fed’s Beige Book, wholesale inventories, and orders for factory, capital and durable goods. The government will also release the unemployment report for February, with the jobless rate expected to tick down to 4.0 percent from January’s 4.1 percent.