Arrow Created with Sketch. Market Commentary

Market Commentary, April 16, 2018 For the week of April 16, 2018

Key Market Data

04/06/2018 04/13/2018 One Week Change YTD One Year
S&P 500 Index 2,604.47 2,656.30 +1.99% -0.10% +16.31%
MSCI EAFE Index 2,013.31 2,042.41 +1.45% +0.55% +18.33%
Barclays Capital U.S. Aggregate Bond Index 2,015.39 2,011.83 -0.18% -1.69% +0.04%
10-year Treasury Note Rate 2.774% 2.828% +5.4 basis points +42.2 basis points +59.0 basis points

The stock market volatility that’s been the recent norm showed no signs of easing last week, but indexes ended comfortably up thanks to some soothing words from an unexpected quarter – China’s President Xi Jinping, a tech rebound and investor confidence about the outcome of the earnings season that’s now underway. By week’s end, the Dow Jones Industrial Average added 1.8 percent, the S&P 500 Index was up 1.9 percent, and the Nasdaq rose 2.8 percent.

The trade war, continued

Stocks surged Tuesday after Xi used a speech – his first since tariffs were imposed – to promote “dialogue rather than confrontation.” He pledged that China would open its doors “even wider” when it came to trade, would lower tariffs on cars and would take steps to avoid the theft of intellectual property. President Donald Trump tweeted that he was “very pleased” with Xi’s “kind words,” adding, “We will make great progress together!”

However, words aside, China is not going to submit quietly to America’s tariffs. The same day that Xi delivered his speech, China filed a complaint with the World Trade Organization protesting the American tariffs on steel and aluminum. Meanwhile, Trump reached out to American farmers who would be hurt, should China impose tariffs on soy beans and sorghum, saying, “They understand that they’re doing this for their country. And we’ll make it up to them.”

A trade pact reconsidered

With trade talk front and center, Trump raised the idea that the he might rejoin the Trans-Pacific Partnership (TPP) that he pulled out of shortly after taking office if he could negotiate “a substantially better deal.” The TPP, created by Former President Barack Obama, was designed as a counterbalance to China and was ratified in March by 11 countries.

Ryan to step down

The GOP was caught off guard when Speaker of the House Paul Ryan (R-Wis.), said he wouldn’t run for re-election this fall so he could spend more time with his family. Ryan recommended the House Majority Leader Kevin McCarthy (R-Calif.) as his successor, but two other contenders promptly threw their hats into the ring, the Majority Whip Steve Scalise (R-La.), and Jim Jordan (R-Ohio), founder of the House Freedom Caucus.

Oil’s rebound

Oil prices reached their highest level since December 2014 last week on the news that global inventories are shrinking because of the production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and Russia, coupled with higher consumption. Prices also rose because of concern that a Friday night retaliatory strike on Syria for its use of chemical weapons might disrupt supply in the Middle East.

China is still not a “currency manipulator;” Russia sanctioned

The Treasury Department once again chose not to brand China a “currency manipulator” last week. It did, however, accuse that nation of “a lack of progress” in “correcting the trade imbalance.” Russia’s stock market fell – and the ruble tumbled against the dollar –, after the U.S. put in place new sanctions against oligarchs, government officials and companies connected to President Vladimir Putin. This was due to Russia’s “worldwide malign activity.”

Zuckerberg visits the Hill

Called before Congress to explain his company’s failure to protect user data, Facebook Founder Mark Zuckerberg said, “We have made a lot of mistakes in running the company,” and admitted that he thought it was “inevitable” that new regulations would be imposed. Investors must have liked what they heard, as Facebook’s stock rose 4.5 percent after his testimony.

The ballooning budget deficit

The Congressional Budget Office said the budget deficit will return to above $1 trillion in 2020. The deficit is expected to be $804 billion this fiscal year compared to $665 billion last year. National debt is projected to go from $21 trillion in 2018 to $33 trillion by 2028, which would represent 96 percent of gross domestic product (GDP), the highest percentage since World War II ended.

The Fed’s minutes

The Federal Reserve Bank of New York’s March meeting minutes showed that although members were confident about the state of the economy, there were concerns about a trade war because of the “prospect of retaliatory trade actions.” Committee members also said they expected inflation to reach the target of 2 percent over the coming year, which could impact the pace of rate hikes.

Q1 earnings season gets underway

The first-quarter earnings season began with strong results from JPMorgan Chase and Wells Fargo, partly because of the tax cuts. FactSet Research Systems Inc. estimates that earnings for S&P 500 companies will be up 17.3 percent from a year earlier, which would be the best result since 2011.

In other news, the Fed said that consumer credit hit an annualized rate of 3.3 percent in February compared to 4.9 percent in January. The Producer Price Index (PPI) rose 0.3 percent in March from the month before and was up 3 percent year over year. Core PPI, less food and energy, rose the same 0.3 percent from February and 2.7 percent for the year. The Consumer Price Index (CPI) fell 0.1 percent but gained 2.4 percent for the year. Core CPI increased 0.2 percent month over month and 2.1 percent for the year.

The National Federation of Independent Business Index of small business optimism fell to a five-month low of 104.7 in March from 107.6 in February, which was the second highest reading ever. The preliminary University of Michigan Consumer Sentiment Index reading for consumer sentiment in April was 97.8 compared to 101.4 in March, which was a 14-year high.

The number of job openings at the end of February had little change from the month before at 6.1 million, but was up 7.7 percent year over year. And first-time jobless claims for the week ending April 6 fell 9,000 to 233,000; the four-week moving average rose 1,750 to 230,000.

A look ahead

This week’s releases will include the latest on retail sales, business inventories, housing starts and building permits, The Federal Reserve Beige Book, industrial production and capital utilization, Consumer Comfort Index and the Conference Board Leading Economic Index.