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Financial Markets Commentary For the week of March 26, 2018

Key Market Data

03/16/2018 03/23/2018 One Week Change YTD One Year
S&P 500 Index 2,752.01 2,588.26 -5.95% -2.76% +12.51%
MSCI EAFE Index 2,043.58 1,989.61 -2.64% -2.43% +14.55%
Barclays Capital U.S. Aggregate Bond Index 2,005.40 2,005.99 +0.03% -1.97% -0.85%
10-year Treasury Note Rate 2.845% 2.814% -3.1 basis points +40.8 basis points +39.4 basis points

Even by recent standards, there was a lot to process last week – a Facebook meltdown, a Federal Reserve Bank of New York (Fed) rate hike, tariffs, what the president dubbed a “ridiculous” 2,232-page spending bill, tariff exemptions, new tariffs, and the prospect of a trade war with China.

It’s little wonder that investors’ heads were spinning, and by the end of the day Friday, the Dow Jones Industrial Average (Dow) and Standard & Poor’s 500 Index (S&P 500) had both posted their worst week since January 2016, down 5.7 percent and 6 percent, respectively, with stocks in pretty much every sector losing ground. And, not surprisingly, given the talk of a trade war, foreign indexes also tumbled for the week, though not as far as in the United States.

Facebook’s fall

The week got off to a rocky start when Facebook’s share price plummeted after it was revealed that a firm affiliated with Trump’s presidential campaign, Cambridge Analytica, had obtained the personal information of millions of Facebook users. By midweek, Facebook’s founder Mark Zuckerberg admitted that “mistakes” had been made, but fear of tighter regulations both here and abroad sent his company’s stock southward – and it took other tech stocks with it. Monday alone, Facebook’s shares fell 6.8 percent as it shed $35 billion in market value and dropped from the top five companies in the S&P 500. By week’s end, the company’s share price had fallen 14 percent, and both Apple and Alphabet fell at least 7 percent.

The Fed pulls the trigger

The least surprising story last week was that the Fed raised its rate for the first time since December, up to a range of 1.5 percent to 1.75 percent. The Fed said it expected two more hikes in 2018 and three in 2019 (one more than it had forecast in December), but some investors were concerned that low unemployment and a stronger economy could add up to four rate increases this year (seven of the Fed’s 15 committee members said they now expected four hikes). The Fed also raised its forecast for median growth in 2018 to 2.7 percent from December’s estimate of 2.5 percent, and said the jobless rate would fall to 3.8 percent this year and to 3.6 percent in 2019. At his first press conference as Fed chairman, Jerome Powell said the committee was looking for “that middle ground” when it came to raising its benchmark rate, which he defined as “further gradual increases in the federal-funds rate.” Speaking to the recent fears of rising inflation and its impact on the economy, he said, “There’s no sense in the data that we’re on the cusp of a sudden acceleration in inflation.” As for the recently announced tariffs, he noted, “There’s no thought that changes in trade policy should have an effect on the current outlook,” though he said that the Fed’s officials might be more concerned if the dispute escalated and other countries retaliated with tariffs of their own, before adding, “We don’t do trade policy here at the Fed.”

Tariffs and talk of a trade war

Speaking of trade policy, since President Trump announced he was putting tariffs on imported steel and aluminum, there’s been speculation about what that would mean for the economy. But by the time the tariffs went into effect Friday, temporary exemptions had been granted to seven nations, all allies, including Canada, Mexico, Brazil and South Korea. On the same day, the president said he was hitting China with $50-to-60 billion in tariffs to punish that nation for stealing our intellectual property, without announcing which goods would be targeted, and also restricting China’s investment in U.S. tech firms. China retaliated with $3 billion in tariffs on a variety of products, including wine, pork and recycled steel, but not on high-ticket U.S. exports such as aircraft and soy beans. For all the talk of a trade war rattling markets at home and abroad, the steps were seen by many as negotiating gambits that could well lead to a deal between the world’s two biggest economies, though how and when that deal will be worked out remains to be seen. As for a trade war, U.S Trade Representative Robert Lighthizer told the House Ways and Means Committee that was not the administration’s goal, but added, “You have to ask yourself, can we go on with an $800 – and growing – billion trade deficit?”

The Group of 20

Meanwhile, Group of 20 Finance Ministers and Central Bank Governors met in Buenos Aires and failed to produce a communiqué on trade, noting that officials “recognize the need for further dialogue and actions.” International Monetary Fund Managing Director Christine Lagarde said she “joined others in reiterating that we should avoid the temptation of inward-looking policies.”

A government shutdown averted, and a warning issued

Congress avoided shutting down for the third time in a year when Republicans and Democrats came together to approve a $1.3 trillion spending bill that will increase military and domestic spending – in other words, each party got something that it wanted. But the bill only funds the government for the rest of the fiscal year, through September, and no one was happy about the process, which included the 2,232-page bill being unveiled Wednesday with the shutdown looming Saturday. Despite grumbling from both parties, especially from fiscally conservative Republicans – Senator Ben Sasse (R - Neb.) described it as a “spending kegger” – it was President Trump who almost scuttled the bill, first calling it “ridiculous” and then saying he would veto it because, among other shortcomings, it didn’t fully fund his border wall. He did sign it, but warned, “I will never sign another bill like this again.”

In other news, the National Association of Realtors said existing home sales rose 3 percent in February from the month before to an annualized rate of 5.54 million, 1.1 percent higher than a year earlier even though inventories were down 8.1 percent over that time. The preliminary estimate for durable goods orders was up 3.1 percent in February, while the estimates for orders for nondefense capital goods ex-aircraft improved 1.8 percent and the estimate for nondefense capital goods shipments ex-aircraft climbed 1.4 percent, all strong numbers. And first-time jobless claims for the week ending March 17 rose 3,000 to 229,000, while the four-week moving average was up 2,250 to 223,750.

A look ahead

This week’s updates will include the latest on the S&P CoreLogic Case-Shiller Home Price Index, the Conference Board Consumer Confidence Index, wholesale and retail inventories, pending home sales, and personal consumption expenditures, as well as the government’s third estimate for fourth-quarter gross domestic product (GDP), expected to be revised up to 2.7 percent from 2.5 percent.