Stocks End Week With Flat Finish
The U.S. equity markets closed a lackluster trading session in mixed territory as stocks seemed to lack conviction, wavering on either side of the “opening mark” throughout the day. Treasuries were nearly unchanged following domestic economic data that showed a rise in personal income, an unexpected decline in personal spending and a lower-than-expected read on consumer sentiment, while a separate release indicated growth in Midwest manufacturing activity continued to exhibit expansion. Meanwhile, crude oil prices, gold and the U.S. dollar were all lower.
The Dow Jones Industrial Average gained 18 points (0.1%) to 16,717
The S&P 500 Index moved 4 points (0.2%) higher to 1,924
The Nasdaq Composite decreased 5 points (0.1%) to 4,243
In moderate volume, 912 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq
WTI crude oil declined $0.87 to $102.71 per barrel, wholesale gasoline was $0.03 lower at $2.97 per gallon
The Bloomberg gold spot price lost $4.37 to $1,251.20 per ounce
Markets were higher on the week, as the DJIA gained 0.7%, the S&P 500 Index added 1.2%, and the Nasdaq Composite Index increased 1.4%.
Mixed bag of economic data to round out week
Personal income rose 0.3% month-over-month in April, matching what economists had projected, and March’s 0.5% rise was unrevised. However, personal spending fell by 0.1% m/m in April, short of expectations for a 0.2% rise, while March’s 0.9% gain was revised to a 1.0% increase. The April savings rate as a percentage of disposable income rose to 4.0%, from March’s downwardly revised 3.6% rate.
The final University of Michigan Consumer Sentiment Index was revised slightly less favorably than expected to 81.9 for May from the preliminary report of 81.8, and compared to the 82.5 revision that economists surveyed by Bloomberg had estimated. April’s figure was a solid 84.1, which was the highest since July 2013.
The weakness came from current conditions component, which declined 4.2 points to 94.5, while the outlook component ticked 1.0 point lower to 73.7. On inflation, the 1-year expectation ticked higher to 3.3%, from April’s 3.2% figure, while the 5-year inflation outlook was adjusted lower to 2.8%, following the 2.9% posted last month.
Rounding out the week’s economic calendar, the Chicago Purchasing Managers Index showed growth in Midwest activity continued to show expansion, posting a better-than-expected reading of 65.5 for May, above expectations of a level of 61.0, after rising to an unrevised 63.0 in April, with a reading above 50 depicting growth.
Treasuries were nearly unchanged, with the yields on the 2-year note and the 30-year bond flat at 0.37% and 3.32%, respectively, while the yield on the10-year note was 1 basis point higher at 2.47%.
Markets higher during holiday-shortened week
With the shortened holiday week, the U.S. equity markets were able to finish the four-day period higher, with the S&P 500 venturing into record-high territory amid some global bond market developments and mixed, but mostly positive, economic reports. Stocks paused mid-week as traders may have been exercising some caution in response to global bond markets rallying, fueled by expectations of further policy easing by global central banks. By weeks end the march continued higher as May was left behind and all thoughts move to June.
U.S. economic data and the ECB in focus
Next week’s U.S. economic calendar will be full of headline data for traders to consider, including the ISM Manufacturing Index, the ISM Non-Manufacturing Index, the Federal Reserve’s Beige Book, the ADP Employment Change, and nonfarm payrolls. Other releases will include construction spending, factory orders, vehicle sales, the trade balance, nonfarm productivity and unit labor costs, as well as consumer credit.
It’s important to note, while we have recently lowered our long-term yield expectations for 2014, we still think the trend for yields is higher as long as the economy continues to improve. However, we feel long-term bond yields will peak at lower levels than years past due to changes in demographic trends that could lower the potential growth rate of the economy and specifically the slow pace of the growth of the labor force.
At WT Wealth Management we currently carry a nominal treasury short in the Tactical Allocation Band in order to stabilize portfolios from a unexpected rise in interest rates. The percentage of the hedge is in accordance with the percentage of assets within the portfolio at risk of an upward interest rate movement. We expect to increase our fixed income hedges/shorts heading into the fall when traders attention will turn to 2015 fiscal policy and a subsequent higher rate environment.
Europe mixed, Asia lower
The European equity markets finished mixed in afternoon action following the mixed bag of reports out of the U.S., and amid sluggish economic news in the region. Germany reported a surprising decline in retail sales for April, while inflation data in Italy showed prices at both the wholesale and consumer levels fell mostly inline with forecasts.
Stocks in Asia finished mostly lower following yesterday’s report on economic output in the U.S. coupled with a slew of disappointing data out of Japan. The island nation’s industrial production and household spending fell more than forecasts and consumer price inflation soared to a 23-year high. So far the Prime Minister Shinzo Abe’s “three arrow” plan to revive the Japanese economy has delivered disappointing results. A sales tax increase on April 1 added to the country’s woes, and the stock market has stalled. While Japanese stocks may have a short-term rebound if the BoJ increases the size of its quantitative easing (QE) program as expected, our outlook on Japan is dimming.
Markets globally will be focused on what type of action the European Central Bank (ECB) takes at its monthly policy meeting on Thursday. Many analysts feel, the ECB has “serious concerns” about the level of the euro in the context of low inflation, and has signaled it is ready to act at the June meeting. Most believe the action is likely to be more symbolic in nature than revolutionary; and there is the risk the market is disappointed. However, we are still optimistic the euro zone’s recovery improves and are encouraged by the apparent turn around in lending a good leading indicator.