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Financial Markets Commentary For the week of February 25, 2019

Key Market Data

02/15/2019 02/22/2019 One Week Change YTD One Year
S&P 500 Index 2,775.60 2,792.67 +0.62% +11.74% +5.35%
MSCI EAFE Index 1,840.10 1,869.15 +1.58% +9.00% -6.05%
Barclays Capital U.S. Aggregate Bond Index 2,069.13 2,071.35 +0.11% +1.21% +3.65%
10-year Treasury Note Rate 2.664% 2.654% -1.0 basis points -3.1 basis points -26.8 basis points

Once again, the major indexes were lagging at mid-week. Once again, they staged a rally to finish in the black. And once again, the major impetus was the prospect of a breakthrough in the trade talks between the United States and China, which were extended through the weekend. President Trump indicated not only that progress was being made, but that he was willing to extend the Mar. 1 deadline by as much as a month and was ready to meet China’s President Xi Jinping to finalize the deal (steps that were confirmed by the president in a tweet on Sunday night). The result? The Dow, back above 26,000 points, and the Nasdaq, have now been up for every week in 2019 – nine weeks in a row, all told – and the S&P 500 closed higher for the fourth week straight and eighth in the last nine. The market even weathered a disastrous Friday for Kraft-Heinz, with its shares plunging 27 percent after a disappointing report for fourth-quarter earnings that included a multi-billion-dollar write-down.

While the stock market has been surging, volatility has been tumbling. In fact, volatility, as measured by the Chicago Board Options Exchange’s Volatility Index, the VIX, has fallen for nine weeks in a row, a record, and is down 47 percent so far this year to back where it was before the fourth quarter of 2018.

The trade talks

The trade war between China and the United States was cited last week as impacting global growth in the minutes of the January meetings of both the Federal Reserve and the European Central Bank, so it’s not surprising that investors latched onto the news that it might be coming to an end. Early last week, the president said that the March deadline was not “a magical date,” and later, when announcing that the negotiating session would continue through the weekend, he added, “There’s a chance that something very exciting can happen,” and, “We have a one-time shot at making a great deal for both countries.” That deal could also address the fate of Huawei’s CFO Meng Wanzhou who was arrested in Canada at America’s behest and who is awaiting extradition here to face charges that her company illegally exported its technology to Iran and North Korea. Not everyone was as upbeat as Trump, however, with U.S. Trade Representative Robert Lighthizer saying there were “very big hurdles” yet to be cleared, and Commerce Secretary Wilbur Ross noting it was “a little early for champagne.” But on Sunday night, Trump did indeed announce an extension of the deadline, saying, “substantial progress” had been made on such fronts as “intellectual property protection, technology transfer, agriculture, services, currency, and many other issues,” though no specifics were offered, adding, “A very good weekend for U.S. & China!”

The EU and the U.S.

Late in the week, the president renewed his threat that he might impose tariffs on European cars and car parts based on a recent, not-as-yet public report from the Commerce Department. Tension between the White House and the European Union has been on the rise with the latter having resisted U.S. requests to isolate Huawei and stop trading with Iran.

The Fed’s minutes

Part of the reason for the rebound from last year’s brutal fourth quarter for stocks has been the news that the Fed was going to slow the pace of its rate hikes. The minutes of the Fed’s most recent meeting on Jan. 29 and 30 confirmed that caution, saying that a break posed “few risks,” while also indicating that “several” committee members are ready to raise the rate than others if the economy “evolved as they expected.” The Fed had been forecasting the potential for two hikes this year after four in 2018. The minutes cited economic concerns such as trade, stubbornly low inflation, increased government spending, the slowdowns in China and Europe, and the recent government shutdown. The Fed will also stop letting its $4 trillion assets portfolio shrink which it has been doing by letting Treasury and mortgage securities mature without reinvesting the money, and soon issue a statement about its plans. The minutes noted that “such an announcement would provide more certainty about the process for completing the normalization” of the balance sheet. The Fed’s next meeting is on Mar. 19 and Mar. 20.

Oil hits a three-month high

Despite the fact that U.S. oil output hit a new all-time high of 12 million barrels a day for the week before last, according to the Energy Information Administration, and that inventories were at their highest level since late 2017, the price of U.S. crude rose last week to close at a three-month high thanks in part to the optimism over the trade deal.

In other news, the Commerce Department issued its report for durable goods orders in December – delayed by the shutdown – showing that orders were up 1.2 percent from November, less than expected. Orders excluding transportation advanced 0.1 percent. Orders for nondefense capital goods excluding aircraft declined 0.7 percent, also below expectations, and were up 2.5 percent for all of 2018 compared to an increase of 13 percent in 2017. The National Association of Realtors said that existing home sales were down 1.2 percent in January from December, off for the third month in a row, to an annualized rate of 4.94 million homes, the lowest total since November of 2015. Sales were down 8.5 percent from January of 2018. The U.S. home builders’ confidence index rose to 62 in February from January’s reading of 58, partly driven up the by the Fed’s retreat on rate hikes which has meant a break from rising mortgage rates. The Conference Board’s leading index was down 0.1 percent in January. The Philadelphia Federal Reserve’s index for current manufacturing activity fell from 17 in January to -4.1 in February, the first negative reading since 2016. First-time jobless claims for the week ending Feb. 16 plunged 23,000 to 216,000; the four-week moving average climbed 4,000 to 235,750. And Apple announced that it will partner with Goldman Sachs on a new credit card paired to the iPhone.

A look ahead

This week’s releases will include updates on wholesale inventories, housing starts and building permits, the S&P CoreLogic Case-Shiller home price index, new and pending home sales, consumer confidence, personal consumption expenditures, vehicle sales, and, because of the shutdown, both the combined first and second estimate for second-quarter GDP, forecast to come in at 2 percent. In addition, the Fed’s Chairman Jerome Powell will visit Capitol Hill to discuss the economy with Congress.