Contributed by Doug Walters
U.S. equities pushed higher this week, preferring to focus on softening trade talk rather than the political drama in Washington. The earnings season kicked off in earnest, and we saw a further flattening of the yield curve.
The S&P 500 ended the week up about 2%. Improving sentiment around trade overshadowed heightened White House tensions and uncertainty surrounding the U.S.’s response in Syria. There was no definitive news on the trade front, yet there appears to be a general sentiment that the introduction of the President’s new economic advisor, Larry Kudlow (who is pro-free trade), will help expedite a NAFTA deal and improved trade relations with China. Later in the week, it was even reported that the U.S. was looking to re-enter the Trans-Pacific Partnership (TPP) trade agreement.
U.S. equity markets seemed to largely dismiss the potential ramifications of the FBI obtaining a warrant to search the President’s personal lawyer and the risk of escalation of the Syrian conflict following another suspected chemical attack by the Assad regime. However, the bond yield curve continued to flatten (see our Spotlight section below).
Spotlight: Flattening Curves
Every winter the Strategic Investment Team initiates a weight loss competition to try and shed some of those extra holiday pounds. Speaking only for myself, this annual “curve flattening,” is a useful investment in my overall health. In the bond market, we have experienced another type of curve flattening. The yield curve flattening, which we discussed in our quarterly perspectives, has continued. The difference between the 2-year and 10-year bond is at a mere 0.46%. But curve flattening in the bond market is typically not viewed as healthy. Economic activity can slow if financial institutions are not incentivized enough to make longer-term loans. We are not there yet, but if the Fed continues to raise short rates, without movement in the longer-term rates, this could become a risk to growth.
STRATEGIC ASSET ALLOCATION
Sizing up Domestic Stocks
While strength in equity markets and around the world point to robust global growth, the fixed income markets seemingly beg to differ. As discussed in our Spotlight, the spread between 2-year U.S. Treasury and 10-year U.S. Treasury is about 0.46% from inverting (lenders demand more interest to lend on the short-end than on the long). On the flip side, equity markets are slowly stabilizing as geopolitical/trade jitters are easing. U.S. small-capitalization stocks took the lead this week. Speaking of U.S. small capitalization stocks…
- The outperformance of small-cap stocks over large-cap following their 20% post-election jump in November 2016 has now nearly closed.
- Yet, the catalysts for small-cap stocks such as lower levels of regulation, corporate tax cuts, and increased M&A activity are still on the table.
- With a trailing price to earnings ratio versus large cap at its lowest since 2010, we recommend overweighting the asset class.
Looking Up at the Sky
The Technology, Energy and Health Care sectors were jostling for positioning on top, while the Consumer Staple and Consumer Discretionary stocks were battling it out at the bottom. In other strategy news…
- The Walt Disney Corp. (DIS) found itself in acquisition news this week, but not in the traditional sense. Disney is pursuing an acquisition of Fox (FOX) (old news) who owns a 39% stake in British network Sky (SKYAY). On Thursday British regulators ruled that Disney would have to bid £10.75 per share for the remaining Sky shares if it succeeded in its attempt to acquire Fox. Also, Disney launched a new sports content streaming app on Thursday. The content would be different than traditional ESPN & ESPN 2 content to avoid hurting the current business.
STRATEGIC EQUITY INCOME
‘Tis the Season
The Consumer Discretionary sector was the clear laggard while Technology bounced back from recent setbacks to top the Energy sector’s big week. In other news…
- BlackRock Corp (BLK), JP Morgan Chase & Co. (JPM) and Fastenal Corp. (FAST) were the first three holdings to kick-off the earnings season. The reports were mixed. Fastenal matched expectations, but rising expenses were an unwelcome development. BlackRock reported a solid quarter, but new asset flows were less than the huge inflow in the previous quarter. Finally, JP Morgan was the first big bank to report, and results were good, but expectations were also very high. CEO Jamie Dimon described the environment as “intensely competitive, and lending was flat for the quarter.”
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||1.6||-0.9|
|Russell 2000 (Small Cap)||2.4||0.9|
|MSCI EAFE (Developed International)||1.4||-0.4|
|MSCI Emerging Markets||0.7||1.0|
|S&P GSCI (Commodities)||5.5||5.8|
|MSCI U.S. REIT Index||-0.8||-10.1|
|Barclays Int Govt Credit||-0.3||-1.8|
|Barclays US TIPS||0.2||-0.9|
The Week Ahead
Contributed by Aleksey Marchenko
Markets SEEM to be Turning Focus to Earnings
Speeches from FOMC member Bostic, Williams, Quarles, Evans, Dudley, and Mester might help investors to get a better idea of the timing of the next Fed rate hike(s).
- According to Bloomberg’s US interest rate probability metric, the next rate hike is widely expected to happen sometime between June and August.
Economics data of note next week include Retail Sales, New Housing Starts and Building Permits, and Industrial Production.
- Retail Sales are estimated to show growth in March with auto sales leading the pack.
- New Housing Starts are expected to reach the 20-year median of around 1,261,000 new houses per month.
- Industrial Production is expected to expand.
Earnings season kicks up steam next week with health care in focus in Strategic Growth with UnitedHealth (UNH) and Johnson & Johnson (JNJ) reporting. In our Equity Income strategy, there should be plenty of interest in the banking space with M&T Bank (MTB), U.S. Bancorp (USB), Bank of New York Mellon (BK) and BB&T (BBT) on the docket.
Meeting of the Economic and Financial Affairs Council (EcoFin) in Europe and the International Monetary Fund meeting in Washington D.C. should be noteworthy.
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