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Financial Markets Commentary For the week of April 02, 2018

Key Market Data

03/23/2018 03/30/2018 One Week Change YTD One Year
S&P 500 Index 2,588.26 2,640.87 +2.03% -0.76% +14.06%
MSCI EAFE Index 1,989.61 2,005.67 +0.81% -1.58% +14.66%
Barclays Capital U.S. Aggregate Bond Index 2,005.99 2,016.48 +0.52% -1.46% +1.19%
10-year Treasury Note Rate 2.814% 2.74% -7.4 basis points +33.4 basis points +31.9 basis points

Another up-and-down week for stocks brought an end to a tumultuous first quarter.

To recap this three-month period, the major indexes notched record after record in January, fell briefly into correction territory in February, and spent March not quite knowing which way to go as investors were preoccupied with the Federal Reserve Bank of New York’s (the Fed’s) plans, tariffs, and turnover in the White House. In fact, the first quarter was the most volatile three-month stretch for stocks since 2011, as measured by the Chicago Board Options Exchange Volatility Index (VIX) , which was up nearly 80 percent. For the quarter, the Dow fell 2.0 percent, snapping a nine-quarter winning streak, while the S&P 500 lost 0.8 percent, its first down quarter since 2015. The Nasdaq rose 2.6 percent, but that was its weakest quarterly performance since the last three months of 2016. As the first quarter closed, investors sought safety, and the yield on the 10-year treasury note rate dipped to its lowest level since January, though the yield still advanced 33 basis points from the start of the year.

China: talks, another threat, and a pair of new leaders at the central bank

Having plummeted at the end of the previous week because of fear of a trade war with China, stocks roared back Monday after The Wall Street Journal reported that the two sides were meeting to discuss next steps. As a result of the news Monday, the Dow (up 2.8 percent), the S&P 500 (up 2.7 percent), and the Nasdaq (up 3.3 percent) all posted their biggest day on a percentage basis since August 2015. However, later in the week, the White House raised the stakes by saying it was considering invoking a law that would limit Chinese investment in sensitive American technology. Meanwhile, there was a changing of the guard at the helm of China’s central bank, as Zhou Xiaochaun, who had the job for 16 years, was replaced by two of President Xi Jinping’s allies. Yi Gang was named governor of the bank, and Guo Shuqing was appointed as the bank’s communist party secretary. Both are reformers, but Guo is seen as having more political clout as he was also recently named China’s top banking and insurance regulator.

South Korea: deal, no deal

The White House announced an agreement “in principle” with South Korea that would grant that country a permanent exemption from the new steel and aluminum tariffs in exchange for concessions on trucks imported to and from South Korea, as well as a quota on the total amount of steel exported to the United States. Treasury Secretary Steven Mnuchin described the deal as “an absolute win-win,” but at week’s end, President Trump said the agreement might be held up until negotiations with North Korea were completed.

Amazon under fire

Amazon’s stock fell last week after the president blasted the online retailer for not paying enough taxes and for taking advantage of the U.S. Postal Service (USPS). In a second round of tweets Saturday, Trump claimed that Amazon costs the USPS “billions of dollars,” adding, “This post office scam must stop. Amazon must pay real costs (and taxes) now!” The attack was seen as partly motivated by the president’s unhappiness with reporting by The Washington Post, which is owned by Amazon’s CEO Jeff Bezos. Even so, it isn’t clear what steps can be taken against Amazon, and Thursday a White House spokesman said, “We have no actions at this time.”

Facebook and Tesla; Walmart and Humana

Facebook had another rough week after its CEO Mark Zuckerberg said he had been summoned to testify before Congress about his company’s practices. And Tesla’s stock plunged after a fatal crash in California in a car using autopilot, and then fell even further after Moody's Investors Services downgraded its debt. Walmart is said to be exploring a partnership with Humana at a time when many health insurers have been joining forces with new partners and retailers have been looking for ways to extend their business footprint – and to battle Amazon. The two companies already collaborate on a co-branded prescription plan at Walmart’s in-store pharmacies.

Q4 GDP revised up to 2.9 percent

The government’s third estimate for fourth-quarter gross domestic product (GDP) was 2.9 percent, revised up from 2.5 percent and above the forecast of 2.7 percent. Consumer spending, which comprises more than two-thirds of growth, was revised from 3.8 percent to 4.0 percent, the fastest clip in three years. GDP growth was 3.2 percent in the third quarter of 2017, and the Federal Reserve Bank of Atlanta’s estimate for first-quarter growth is currently 2.4 percent.

In other news, personal income rose 0.4 percent in February from the month before, and the savings rate was 3.4 percent, the highest level since August 2017. Personal spending was up 0.2 percent while real spending was unchanged. The personal consumption expenditures (PCE) price index rose 0.2 percent while the index less food and energy climbed the same 0.2 percent. The PCE index was up 1.8 percent year over year, while the core PCE index, the Fed’s preferred yardstick for inflation, increased 1.6 percent. Retail inventories rose 0.4 percent in February from the month before, while wholesale inventories were up 1.1 percent. Pending home sales improved 3.1 percent in February from January’s decline of 5.0 percent; sales were down 4.4 percent year over year. The S&P CoreLogic Case-Shiller home price index was up 6.2 percent in January from a year earlier, compared to an increase of 6.3 percent in December. The Conference Board’s consumer confidence index fell to 127.7 in March, down from February’s reading of 130.0, which was an 18-year high. The University of Michigan’s consumer sentiment for March was revised down from the original estimate of 102 to 101.4, but that was still the highest reading since 2004. And first-time jobless claims for the week ending March 24 fell 12,000 to 215,000, their lowest level since January 1973; the four-week moving average dropped 500 to 224,500.

A look ahead

This week’s releases will include updates on construction spending, the Institute for Supply Management (ISM)’s manufacturing and nonmanufacturing indexes, vehicle sales, factory orders, orders for durable and capital goods, the trade balance, consumer credit, consumer comfort, and the jobless rate for March, expected to fall to 4.0 percent from 4.1 percent.