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Market Commentary, May 7, 2018 For the week of May 7, 2018

Key Market Data

04/27/2018 05/04/2018 One Week Change YTD One Year
S&P 500 Index 2,669.91 2,663.42 -0.24% +0.23% +13.66%
MSCI EAFE Index 2,042.83 2,031.20 -0.57% +0.42% +13.16%
Barclays Capital U.S. Aggregate Bond Index 1,999.46 1,999.85 +0.02% -2.27% -0.12%
10-year Treasury Note Rate 2.958% 2.951% -0.7 basis points +54.5 basis points +59.6 basis points

Thanks to the jobs report and a surge from Apple, stocks rallied Friday to help the major indexes more or less break even for the week. The Dow Jones Industrial Average and Standard & Poor’s 500 Index (S&P 500) were off 0.2 percent while the Nasdaq gained 1.3 percent.

But continuing concerns about rising inflation and a trade showdown with China weighed on investors, who seem to have settled into a wait-and-see attitude, because the S&P 500 and the Dow briefly fell into correction territory back in February. The yield on the 10-year Treasury Note Rate, which recently hit 3 percent, was virtually unchanged even as the government announced an increase in issuance to manage its rising debt load.

The jobless rate

Friday, the United States Department of Labor said the jobless rate for April fell to 3.9 percent, its lowest level since 2000. The Federal Reserve Bank of New York has said it expects the rate to dip to 3.8 percent by year-end. The psychological boost of the rate falling below 4 percent helped the stock market rally, but the numbers in the report weren’t all good. For instance, wages were up 2.6 percent over the previous 12 months – which is solid but not strong growth. And, for the second month straight, the number of jobs created was below expectations, coming in at 164,000. Even so, the monthly average for 2018 stands at 200,000 compared to 182,000 last year, and jobs have now been added to the economy for a record 91 consecutive months.

Earnings – and Apple

With the earnings season almost over, S&P 500 companies still appear to be on track for their best year-over-year showing since 2011. And last week’s performance from Apple proves this as shares of the world’s most valuable company rose 13.3 percent to close at a new high Friday. Apple was given a boost by its upbeat earnings report, which included the news that it would buy back $100 billion in stock and raise its dividend 16 percent. Also contributing to the boost is the fact that businessman Warren Buffett had bought another 75 million shares of the company, bringing his total to 240 million.

Trade delegates return empty handed; allies granted an extension

A delegation that included Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer spent two days in China discussing trade, but they left with nothing to show for it and no comment. The Americans presented a list of demands that included China reducing the trade gap with the United States by $200 billion no later than June 2020 – it was $350 billion last year. The U.S. also wanted China to improve protection of intellectual property and curtail its proposed investment in its “Made in China 2025” plan to upgrade its industry and technology. China, in turn, asked the U.S. to make it easier to invest in American technology and to put off the threatened $150 billion in new tariffs. The two sides agreed to keep talking, but the date of the next meeting was not set.

Earlier last week, with the deadline looming, President Donald Trump delayed the steel and aluminum tariffs against the European Union (EU), Canada and Mexico until June 1. This would allow the two sides more time to negotiate. The EU, for one, was far from upbeat about the extension. Its executive arm, the European Commission, issued a statement that said, “The U.S. decision prolongs market uncertainty, which is already affecting business decisions,” adding, “We will not negotiate under threat.”

The Fed stands pat

As expected, the Fed didn’t raise its benchmark interest rate when it met last week, though it’s still seen as likely that the Federal Reserve will raise its benchmark rate for the second time this year when it next meets in June. The Fed’s statement noted that inflation had moved closer to its target of 2 percent on a “12-month basis.” It also used the word “symmetric” to describe inflation, meaning it could go over 2 percent this year before subsiding. The committee omitted language that had been in its March statement, deleting, “the economic outlook has strengthened in recent months."

Inflation hits 2 percent, for now

As the Fed was getting ready to convene, the U.S. Department of Commerce said personal income rose 0.3 percent in March from February, while spending increased 0.4 percent. Importantly, the Personal Consumption Expenditures (PCE) Price Index was up 2 percent from a year earlier, which is the Fed’s mandate. Core PCE, excluding food and energy, rose 0.2 percent month over month and 1.9 percent year over year.

The judge is out on AT&T; Marathon Petroleum makes a bid for No. 1

In the same week that T-Mobile and Sprint announced a proposed merger – which will be subject to federal scrutiny – the case brought by the U.S. Department of Justice to block the proposed acquisition of Time Warner by AT&T went to the judge. He will now decide whether the $85 billion deal would hurt consumers (as the government claims). And Marathon Petroleum Corporation announced a $23 billion deal to acquire Andeavor, which would make Marathon Petroleum the nation’s largest oil refiner, passing Valero Energy Corporation.

In other news, the Institute for Supply Management (ISM) Manufacturing Index declined to 57.3 in April from 59.3 in March – perhaps because of the brewing trade war – but remained well above the 50 reading that indicates expansion. The ISM Non-Manufacturing Index dipped to 56.8 from 58.8.

With trade talk in the news, the trade gap narrowed 15.2 percent in March to -$49 billion, the largest month-over-month decline in two years. February’s deficit was revised to -$57.7 billion, the highest total since 2008. Imports fell 1.8 percent in March and exports rose 2 percent to a record high, mainly thanks to sales of commercial aircraft and soybeans. The trade gap with China declined 11.6 percent to -$25.9 billion, while exports to China increased 26.3 percent.

Orders for factory goods were up 1.6 percent in March and climbed 7.7 percent over the last year. Orders for non-defense capital goods excluding aircraft were off 0.4 percent, and shipments of core capital goods fell 0.8 percent. Pending home sales rose 0.4 percent in March from the month before, but were down 4.4 percent year over year. Construction spending fell 1.7 percent in March but was up 3.6 percent year over year. And first-time jobless claims for the week ending April 28 fell 2,000 to 211,000; the four-week moving average dropped 7,750 to 221,500, its lowest level since 1973.

A look ahead

Next week’s updates will include the latest on consumer credit, small business optimism, the Consumer Price Index, the Producer Price Index and wholesale inventories.