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Market Commentary, March 12, 2018 For the week of March 12, 2018

Key Market Data

03/02/2018 03/09/2018 One Week Change YTD One Year
S&P 500 Index 2,691.25 2,786.57 +3.54% +4.63% +20.17%
MSCI EAFE Index 2,005.08 2,040.90 +1.79% -0.07% +20.50%
Barclays Capital U.S. Aggregate Bond Index 2,003.27 2,000.94 -0.12% -2.22% +1.69%
10-year Treasury Note Rate 2.865% 2.895% +3.0 basis points +48.9 basis points +28.9 basis points

A month ago, the government’s jobs report set off a stock-market swoon that dragged the S&P 500 and the Dow Jones Industrial Average (the Dow) into correction territory.

On Friday – fittingly the ninth anniversary of the market’s ongoing bull run – the unemployment report, along with the news that there would be wiggle room for allies under the new trade tariffs, triggered a stock-market surge that drove the Dow back past the 25,000-point mark and pushed the Nasdaq to a record high of 7,560.81.

The tariff conversation continues

The week began with investors, not to mention congressional Republicans, fretting about the impact of President Donald Trump’s proposed tariffs on aluminum and steel, which they thought would offset the benefits of the recent tax cuts. Early in the week, for instance, more than 107 House Republicans sent a letter to the president asking him to reconsider the tariffs. Nerves were further jangled when Gary Cohn, the president’s chief economic advisor and an advocate of free trade, resigned.

An association representing 114 aluminum companies asked the government to abandon the plan and instead target China, noting, “We fear the proposed tariffs may do more harm than good.” However, when President Trump announced the plan on Thursday, he said that Mexico and Canada could be exempt – pending the renegotiation of the North American Free Trade Agreement – and other countries can negotiate to receive exemptions. “Countries are going to be happy,” he said, “we’re going to show great flexibility.” (On Saturday, trade representatives from Japan and the European Union (EU) met with the United States Trade Representative Robert Lighthizer in Brussels to discuss the path to exemptions.) The president also said that he had told China that our trade deficit had to be reduced by $100 billion, about one-third of the total. Still, the tariffs were far from being embraced. Speaker of the House Paul Ryan (R - Wisconsin) said, “I disagree with this action and fear its unintended consequences.”

Mario Draghi, president of the European Central Bank (ECB), observed, “If you put tariffs against your allies, one wonders who the enemies are.” Furthermore, the 11 countries that President Barrack Obama invited to join the Trans-Pacific Trade Pact to counter China’s economic might, just concluded an agreement that will encourage open trade and lower tariffs among member countries, including Japan, Mexico, Canada and Australia (President Trump withdrew from the trade alliance shortly after he took office). Historians noted that the three-year tariff on steel imposed in 2002 by President George Bush, was ended after only 15 months because of retaliation from allies and pushback from the World Trade Organization. It was also later found to have cost more jobs than it created.

The jobs report

January’s job report showed that wages were up 2.9 percent year over year, which led to the market’s plunge because investors saw it as a sign that inflation, and interest rates, would climb. In the report for February, wages were up only 2.6 percent over the past year, and January’s estimate was revised down to 2.8 percent. In addition, 313,000 jobs were created, well over the estimate of 205,000 and the largest total since July 2016. Better still, 806,000 Americans joined the workforce and the labor force participation rate rose to 63 percent from 62.7 percent, the biggest month-over-month gain since 1983 (except in months in which temporary census workers were hired). The jobless rate remained at 4.1 percent, the lowest level since 2000, for the fifth month in a row.

We’ll be #1

With Saudi Arabia already in its rearview, the U.S. is now projected to pass Russia, the world’s number one oil producer, by 2023, according to the International Energy Agency latest five-year forecast. Further, we will be responsible for 60 percent of the new oil produced between now and 2023 and also be exporting 4.9 million barrels a day by then.

Around the eurozone: Italy’s elections and the ECB stands pat, for now

The recent elections in Italy, not only left no clear winner, but also increased the number of seats for parties or coalitions seen as rightist and anti-EU. The Five Star Movement won the highest percentage of the vote at 32 percent, followed by a conservative coalition whose parties together accounted for 37 percent. Prime Minister Mateo Renzi’s party only won 20 percent of the vote.

The ECB left its interest rate and stimulus spending unchanged. However, it dropped a sentence that had become standard in its recent statements about increasing stimulus, the phrase: “if the outlook becomes less favorable.” Though Draghi cautioned “we cannot declare victory yet,” some now believe the bank will end its stimulus spending this year because of the region’s economic rebound. Eurozone Gross Domestic Product was 2.4 percent in the fourth quarter and the jobless rate was at 8 percent, its lowest point in a decade.

President for life?

As expected, China’s legislature officially repealed the 10-year term limit for presidents that’s been in place since Mao’s death in 1976. This opens the door to President Xi Jinping indefinitely pursuing what The New York Times called his “hardline, authoritarian rule.”

In other news, the Federal Reserve Bank of New York (the Fed) said that U.S. household net worth hit a record $98.746 trillion in the fourth quarter though the savings rate in 2017 declined to 3.74 percent compared to 5.98 percent in 2016. The average rate for a 30-year fixed mortgage hit 4.46 percent last week, the highest rate in four years and the ninth straight week of increases; the rate was 3.95 percent at the beginning of 2018. The Institute for Supply Management’s Non-Manufacturing Index fell from 59.9 percent in January to a still very robust 59.5 percent in February. Factory orders declined 1.4 percent in January from the month before, while orders ex-transportation rose 0.4 percent. Orders for durable goods fell 3.6 percent, and orders ex-transportation dipped 0.3 percent; orders for nondefense capital goods excluding aircraft fell 0.3 percent. Wholesale inventories were up 0.8 percent in January from February. January’s trade balance was -$56.6 billion compared to -$53.9 billion in December. And first-time jobless claims for the week ending March 3 rose 21,000 to 231,000; the four-week moving average increased 2,000 to 222,500.

A look ahead

This week’s long list of releases will include the latest on small business optimism, the Consumer and Producer Price Indexes, retail sales, business inventories, consumer sentiment, housing starts and building permits, and industrial production and capacity utilization.