Monthly Archives: April 2018

Random Thoughts from the CIO

In the week just ended, the S&P 500 essentially treaded water while a sub-surface rotation appeared to be unfolding.

In particular, the S&P 500 Value Index topped the S&P 500 Growth Index, causing many investors to wonder if the market is going through a late-cycle rotation from growth to value.

Unfortunately, this the growth-to-value rotation has not been as consistent as many would believe. Indeed, looking at price returns six months before, during and after bear markets and corrections since 1980, the S&P 500 Growth Group has recorded a greater frequency of beating the S&P 500 than has the Value group.

What’s more, the Growth group’s 10.6% CAGR since 1975 has made it a better long-term holding than the Value group’s 9.2% CAGR, provided you could have withstood the near 30% increase in volatility. As a result, only more active investors would likely benefit from attempting to rotate between growth and value.

From a fundamental perspective, 2018 estimated EPS growth is fairly similar for both the S&P 500 Growth and Value Indices. According to S&P Capital IQ consensus estimates, the S&P 500 Value Index is projected to record an 18.9% growth in EPS, as compared with an 18.3% advance for the growth group.

Valuation differences are easier to spot, however, as the Growth Index sports a hefty 2018E P/E of 19.8X, while the Value Index has a more manageable multiple of 14.6X.

Finally, from a technical perspective, the rolling 52-week relative strength between the S&P 500 Growth vs. Value Indices topped out in early March at more than one standard deviation above the mean, and is now a shade below its 39-week moving average. This change in trend implies, but not guarantee, that an additional attraction to value may lie ahead.

U.S. Market Weekly Summary – Week Ending 04/27/2018

S&P 500 Posts 0.01% Weekly Drop; Declines Led by Industrials, Materials Nearly Offset by Utilities-Led Gainers

The Standard & Poor’s 500 index fell by a scant 0.01% this week, with declines across four sectors led by industrials and materials being nearly offset by gains in seven sectors led by utilities.

The market benchmark ended the week at 2,669.91, just barely below last week’s closing level of 2,670.14.

The small weekly movement came as investors sifted through US corporations’ quarterly earnings results and forward guidance to determine the winners and losers in Q1 and going forward.

The industrial sector had the largest percentage decline of the week, down 3.1%, as construction- and mining-equipment maker Caterpillar (CAT) sparked sector-wide worries by saying its outlook assumes the company’s Q1 adjusted earnings per share represented “the high-water mark” for 2018.

Caterpillar’s shares dropped 5.6% on the week as the warning — based on concerns material cost increases will be greater than price realization — overshadowed better-than-expected Q1 results and a boost to the company’s 2018 EPS guidance.

Among other earnings reporters in the industrial sector, American Airlines shares fell 7.2% on the week as the airline reported Q1 results above analysts’ expectations but cut its guidance for 2018 adjusted EPS, citing higher fuel prices.

The materials sector had the second-largest drop of the week, slipping 2.1%.

On the upside, utilities sector had the largest percentage increase of the week, up 2.8%. Among the gainers, shares of Entergy rose 4.0% despite the electric-power producer and retail-electric distributor’s report of weaker-than-expected adjusted EPS, as the company affirmed its earnings guidance for the year, which was above analysts’ mean estimate.

Market Insights 4/27/2018

U.S. stocks finished fairly flat with the Nasdaq and S&P 500 paring solid earlier gains.

Treasuries and gold were higher and the U.S. dollar and crude oil prices were mostly flat. In economic developments, an advance read on Q1 GDP topped forecasts and a report on consumer sentiment bested expectations.

The Markets…

The Dow Jones Industrial Average declined 11 points (0.1%) to 24,311

The S&P 500 Index added 3 points (0.1%) to 2,670

The Nasdaq Composite gained 1 point to 7,120

In moderate volume, 729 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil dipped $0.09 to $68.10 per barrel and wholesale gasoline was $0.01 higher at $2.11 per gallon

The Bloomberg gold spot price increased $6.55 to $1,323.35 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 91.50

Markets were mostly lower for the week, as the DJIA declined 0.6%, the S&P 500 Index was nearly unchanged, and the Nasdaq Composite ticked 0.4% to the downside

First look at Q1 GDP tops forecasts, consumer sentiment revised higher than expected

The first look (of three) at Q1 Gross Domestic Product , the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 2.3%, after the unrevised 2.9% expansion in Q4, and north of the 2.0% growth forecasted by Bloomberg. Personal consumption gained 1.1%, in line with forecasts and following the unadjusted 4.0% increase recorded in Q4. Additionally, the stronger-than-expected growth came as nonresidential fixed investment, exports, private inventory investment and government spending contributed, more than offsetting an increase in imports, which are a subtraction in the calculation of the figure.

On inflation, the GDP Price Index came in at a 2.0% rise, below expectations of a 2.2% gain and the unrevised 2.3% increase seen in Q4, while the core PCE Index, which excludes food and energy, moved 2.5% higher, matching expectations, and following the unadjusted 1.9% advance in Q4.

Treasuries finished higher, with the yield on the 2-year note flat at 2.48%, while the yield on the 10-year note declined 2 basis points (bps) to 2.96% and the 30-year bond rate decreased 4 bps to 3.13%.

Treasury yields continued to retreat from a recent rally, with the yield on the 10-year note dipping further south of 3.00%, which it hit this week for the first time since early 2014. The run in bond yields has caused some uneasiness and thwarted an attempt last week for the stock market’s move into positive territory for the year. The U.S. dollar extended a grind higher, underpinned by some slightly more dovish tones from the European Central Bank and Bank of England recently, along with a solid start to earnings season and a continued strong economic backdrop.

The final April University of Michigan Consumer Sentiment Index was adjusted higher to 98.8 from the preliminary level of 97.8, versus forecasts of a revised 98.0 reading, but still below March’s near 14-year high of 101.4. upward revision came as a favorable adjustment to the expectations component of the survey overshadowed a downward adjustment to the current conditions portion of the report. Both were down versus March. The 1-year inflation forecast dipped m/m to 2.7% from 2.8% and the 5-10 year outlook remained at March’s 2.5% rate.

Europe and Asia mostly higher

European equities finished mostly higher following yesterday’s solid gain in the U.S. that came as the recent rally in Treasury yields paused. A host of data continued to pour in and geopolitical concerns cooled some more as North and South Korea pledged to end a seven-decade war this year after an historic summit between the two nations.

The mostly positive earnings reports and stronger-than-expected Q1 GDP report in the U.S. aided sentiment, while profit results on this side of the pond were mixed. The euro got a reprieve from yesterday’s decline versus the U.S. dollar that followed the ECB’s monetary policy decision. The British pound finished solidly lower to help lift U.K. markets on the heels of a softer-than-expected Q1 U.K. GDP report. Bond yields were lower. In other economic news, Eurozone economic confidence came in above estimates for April, despite the soft patch of data seen as of late.

Stocks in Asia finished higher, on the heels of yesterday’s gains in the U.S., bolstered by strong earnings results and a solid economic backdrop, while geopolitical concerns cooled with focus on an historic meeting between North and South Korean leaders. Japanese equities rose, with the yen choppy amid some mixed economic data and as the Bank of Japan (BoJ) left its monetary policy stance unchanged as expected. Japan’s retail sales unexpectedly declined in March, while industrial production last month rose more than forecasted. The BoJ pledged to continue to pursue its inflation goal of 2.0%, but omitted a mention of the projected time frame for hitting the target.

Stocks trading in both mainland China and Hong Kong advanced in the wake of some upbeat results from the nation’s banking sector. Australian, Indian and South Korean securities all finished higher.

Stocks dip as catalysts clash

U.S. stocks finished slightly lower on the week, even as earnings season heated up and were mostly positive and the economic calendar delivered more signs that the risk of a recession remains faint. However, the markets continued to be skittish, with tightening financial conditions concerns amid the 10-year Treasury note’s charge to the psychological 3.0% level and the greenback’s newfound upward momentum, replacing geopolitical and trade uneasiness, which eased a bit.

With just over half of the S&P 500 companies having posted quarterly results, about 69% have topped revenue forecasts and approximately 78% have exceeded profit projections.

Facebook Inc. was able to escape the continued scrutiny of a flood of reports from the tech sector, which pressured Google parent Alphabet Inc., and Dow member Boeing Company blew away estimates. But the risk of the high hurdle accompanying the earnings season was evident by the sharp downside reversal in the markets earlier in the week in reaction to of Dow component Caterpillar Inc’s warning that the quarter “will be the high watermark for the year.”

Utilities stocks were the best performers amid some market defensiveness, while tech, financials, materials and industrials led the downside move. Real estate issues moved nicely higher with existing home sales, new home sales and housing prices headlining the economic front, along with Consumer Confidence and Friday’s Q1 GDP report.

The closely-eyed move in bond yields sets the stage for next week’s economic calendar that is chock full of key reports that could keep stoking volatility. Personal income and spending will kick things off, followed by the ISM Manufacturing Index, monthly auto sales, preliminary Q1 non-farm productivity and unit labor costs, the trade balance and the ISM non-Manufacturing Index.

However, the main sources of choppiness will likely be Wednesday’s conclusion of the Fed’s monetary policy meeting, expected to bring no change, and Friday’s April non-farm payroll report, projected to show job growth remains solid and wage growth continues to nudge higher.

Stingy consumer spending in GDP report grabs the attention of economists

A big drop in vehicle purchases weighed on household spending

The numbers: The U.S. grew in the first quarter at the slowest pace in a year owing to a big pullback in consumer spending, but the economy held up better than expected owing to solid business investment and a smaller trade deficit.

The U.S. expanded at a 2.3% annual pace in the first three months of 2018, somewhat slower than the average 3% gain in the prior three quarters, the government said Friday.

Economists polled by MarketWatch had forecast a 2% increase in gross domestic product.

The rate of inflation rose to 1.8% from 1.7% year over year, reflecting the recent trend of rising prices.

What happened: Consumer spending rose a scant 1.1% to mark the smallest increase in almost five years. The slowdown followed a 4% gain in the fourth quarter that was the biggest in three years. Americans spent a bundle during the best holiday shopping season since 2010, but they took a breather to pay off their bills and rebuild their savings. Severe bouts of bad weather in early 2018 also hindered spending.

Households spent a lot less on new cars and clothes, among other things.

Businesses picked up the slack, however. Investment in structures such as office buildings and drilling rigs doubled to 12.3% while spending on equipment was up 6.1%. The biggest corporate tax cuts in 30 years may have helped give a lift to investment in the first quarter.

The value of inventories, which adds to GDP, also increased to $33.1 billion from $15.6 billion.

Investment in new housing was flat.

In a surprise, the U.S. trade picture brightened. That also contributed to the higher-than-expected GDP. Exports rose 4.8% to outpace a 2.6% increase in imports.

Government spending was also a bit stronger than expected, up 1.2%.

Inflation as measured by the PCE price index, meanwhile, rose at a 2.7% annual rate in the first quarter. The year over year rate of Inflation edged up to 1.8% from 1.7%.

A spring rebound would fit a longstanding pattern. For nearly two decades GDP has grown twice as fast in the final nine months of the year vs. the first three months, an anomaly that traces in part to a faulty government formula in accounting for seasonal variations.

Inflation has been creeping higher and that may push the Federal Reserve to raise interest rates more aggressively, a strategy that could slow the economy and cause further declines in the stock market. Rising trade tensions and higher oil prices are also giving businesses and consumers cause for worry.

**Click to Enlarge**

Here’s the reaction of economists to a slowdown in gross domestic product in the first quarter — the weakest spurt of U.S. growth in a year.

U.S. GDP was a tad firmer than expected to start the year, but with that gap largely driven by inventory building, there will be no rush to rewrite the outlook for the year as a whole.”

— Avery Shenfield, CIBC Capital Markets

“As expected, consumer spending slowed sharply. That’s not unusual following a strong quarter. There may have been some weather effects and seasonal adjustment could be an issue.”

— Scott Brown, Raymond James.

“The big disappointment was the slowdown in consumption growth to only 1.1% annualized, from 4.0% in the final quarter of last year. That was partly due to the drop back in motor vehicles spending, following a post-hurricane spike at the end of last year. Nevertheless, with labor market conditions strong and the tax cuts boosting disposable incomes by 6.1% annualized in the quarter, the outlook for consumption remains positive.”

— Paul Ashworth, Capital Economics

“Consumer spending growth slowed in the first quarter. Individual tax cuts should add to consumer spending power later in the year, as could accelerating wage growth, particularly with the pickup in today’s employment cost index data. Soft retail sales numbers to begin the year contributed to a larger inventory build, adding to GDP growth and partially offsetting the slowdown in consumption.

— Brian Schaitkin, The Conference Board

“With strong growth and inflation beginning to follow, the real story of Q1 GDP data, it is increasingly difficult to argue for the federal funds rate to trade below inflation and, more to the point, that somehow the 2% inflation target hasn’t already been breached. Could the Fed go [next] week? Not likely, but there are no rules preventing it. A more hawkish statement is coming.”

— Steven Blitz, TS Lombard.

Market Insights 4/26/2018

U.S. stocks traded solidly higher during Thursday’s session in the wake of some upbeat earnings reports and mostly better-than-expected reads from the economic calendar, ahead of tomorrow’s advance read on Q1 GDP.

Treasury yields dipped on the longer end of the curve, giving back some of a recent run, while the U.S. dollar continued to grind higher, crude oil prices advanced and gold traded lower.

In central bank action, the European Central Bank maintained its policy stance as expected and tomorrow the Bank of Japan will deliver its monetary policy decision.

The Markets…

The Dow Jones Industrial Average rallied 239 points (1.0%) to 24,322

The S&P 500 Index jumped 28 points (1.0%) to 2,667

The Nasdaq Composite surged 115 points (1.6%) to 7,119

In moderate volume, 832 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.14 to $68.19 per barrel and wholesale gasoline was $0.01 higher at $2.10 per gallon

The Bloomberg gold spot price dipped $5.65 to $1,317.48 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.5% at 91.59

Durable goods orders well above expectations, jobless claims fall

March preliminary durable goods orders increased 2.6% month-over-month, compared to the Bloomberg estimate of a 1.6% gain, and February’s 3.0% increase was revised to a 3.5% rise. Ex-transportation, orders were flat m/m, below forecasts of a 0.5% rise and compared to February’s revised 0.9% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 0.1%, versus projections of a 0.2% increase, and following the revised 0.9% advance posted in the month prior.

Weekly initial jobless claims declined by 24,000 to 209,000, versus the Bloomberg expectation calling for a slight decline to 230,000, with the prior week’s figure upwardly revised at 233,000. The four-week moving average decreased by 2,250 to 229,250, while continuing claims declined by 29,000 to 1,837,000, south of estimates of 1,850,000.

The advance goods trade balance shrank by a larger amount than expected, posting a deficit of $68.0 billion in March, from the downwardly revised $75.9 billion in February, and versus expectations of a $74.5 billion shortfall.

Treasuries finished higher, as the yield on the 2-year note was nearly unchanged at 2.48%, while the yields on the 10-year note and the 30-year bond declined 4 basis points (bps) to 2.99% and 3.17%, respectively.

Treasury yields cooled a bit from a recent rally that took the 10-year rate above 3.00% and the 2-year to the 2.50% mark for the first time since 2014 and 2008, respectively, causing some uneasiness and fueling a skid for the stock market that came after nudging briefly into positive territory for the year last week. The U.S. dollar resumed its latest upward trend and the markets continue to wrestle with concerns about tighter financial conditions and resurfacing inflation expectations, along with a solid start to earnings season and a continued strong economic backdrop.

Tomorrow, the U.S. economic calendar will bring the first look (of three) at Q1 Gross Domestic Product, with the broadest measure of economic output anticipated to show a quarter-over-quarter annualized rate of expansion of 2.0%, down from the 2.9% q/q rate registered for the final read of Q4. Investors will also receive the Employment Cost Index for Q1, expected to have increased 0.7% q/q and later in the morning the final University of Michigan Consumer Sentiment Index will be released, anticipated to have ticked higher to 98.0 from the advance read of 97.8, but still down from March’s final read of 101.4.

Europe higher on back of upbeat earnings, Asia mixed

European equities erased an early decline and finished higher following some upbeat earnings reports, and after the European Central Bank (ECB) left its monetary policy steady and made no changes to its bond-buying plans, as was widely expected.

In his press conference, ECB President Mario Draghi recognized that the softness in economic data and that momentum has moderated, but he reiterated his confidence in the region’s economic health, as well as inflation eventually reaching the ECB’s target of close to 2.0%. Regarding the ECB’s bond-buying program, Draghi added that the Committee refrained from debating an end to its asset purchases, nor did it focus on the volatility in its currency.

The euro turned lower versus the U.S. dollar following his remarks, while the British pound was higher against the greenback, and bond yields were lower.

Stocks in Asia diverged following the mixed performance in the U.S. yesterday, as the rise in Treasury yields and U.S. dollar continued to create uneasiness regarding tightening financial conditions and increased inflation expectations. Weakness in technology issues also carried over from yesterday in early trading. South Korean shares traded higher and Japanese equities rose with the yen lower against its U.S counterpart and amid the start to the Bank of Japan’s two-day monetary policy meeting.

Stocks trading in both mainland China and Hong Kong fell despite an announcement from Chinese regulators indicating the country would relax capital controls, in line with its recent promises. Indian equities ticked higher, while Australian securities dropped after returning to action following yesterday’s holiday amid weakness in financials.

Market Insights 4/25/2018

After experiencing numerous swings in and out of both side of the unchanged mark, U.S. equities finished mixed and very near the faltline, with the Dow getting a boost from an upbeat earnings report from Dow member Boeing.

However, the continued rise in Treasury yields and the U.S dollar that has fomented recent concerns over financial conditions and increased inflation expectations made for the bumpy ride for the markets.

Gold finished lower and crude oil prices were mixed.

The Markets…

The Dow Jones Industrial Average rose 60 points (0.3%) to 24,084

The S&P 500 Index added 5 points (0.2%) to 2,639

The Nasdaq Composite lost 4 points (0.1%) to 7,004

In moderate volume, 788 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.35 to $68.05 per barrel and wholesale gasoline was $0.01 lower at $2.09 per gallon

The Bloomberg gold spot price fell $7.11 to $1,323.24 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.5% at 91.19

Mortgage applications dip

The MBA Mortgage Application Index dipped 0.2% last week, following the prior week’s 4.9% gain. The slight decline came as a 0.3% decrease in the Refinance Index was met with a flat reading for the Purchase Index. The average 30-year mortgage rate rose 7 basis points to 4.73%.

Treasuries were lower, as the yield on the 2-year note rose 2 bps to 2.49%, and the yields on the 10-year note and the 30-year bond increased 4 bps to 3.02% and 3.21%, respectively.

Treasury yields have extended a recent rally that has the 10-year rate above 3.00% for the first time since early 2014 and the 2-year note hitting the 2.50% mark since 2008, causing some uneasiness and adding fuel to yesterday’s drop for the stock market that came after equities nudged briefly into positive territory for the year last week. The U.S. dollar has regained some upward momentum and the markets continue to grapple with concerns about tighter financial conditions and resurfacing inflation expectations, along with a solid start to earnings season and a continued strong economic backdrop.

Tomorrow’s economic calendar will be fairly busy, beginning with weekly initial jobless claims, predicted to tick lower to a level of 230,000 from the prior week’s 232,000, followed by preliminary durable goods orders for March, expected to indicate a 1.6% m/m increase, while ex-transportation orders are expected to have risen 0.5% m/m, and non-defense capital goods ex-aircraft are anticipated to post a 0.6% m/m gain.

The advance goods trade balance will also be released, with economists anticipating the deficit to shrink modestly to $75.0 billion during March from the $75.4 billion shortfall posted the month prior, while the April Kansas City Fed Manufacturing Index will round out the day, expected to remain at March’s level of 17, with a reading above zero indicating expansion in activity.

Europe and Asia lower as U.S. uneasiness persists

European equities finished lower, even as some earnings and economic data in the region were relatively positive and despite declines for the euro and British pound as the U.S. dollar regained some upward momentum.

The global markets remain relatively unnerved by rising bond yields, notably in the U.S., which are adding to concerns about the impact of the tightening financial conditions.

Bond yields in the Euro-region were mostly higher, ahead of tomorrow’s monetary policy decision from the European Central Bank. In economic news, French consumer confidence unexpectedly improved in April. A soft patch in economic data in Europe recently has also been a source of uneasiness.

Stocks in Asia finished lower following the solid drop in the U.S. yesterday as rising Treasury yields continued to create uneasiness regarding tightening financial conditions. Technology issues also remained hamstrung and Japanese securities declined, paring some losses late in the day as the yen gave back some of yesterday’s rise. The move came as the Bank of Japan is expected to begin its two-day monetary policy meeting tomorrow.

Stocks in mainland China and Hong Kong fell sharply, and those traded in India and South Korea also lost ground.

Markets in Australia were closed for a holiday.

Random Thoughts

U.S. equity markets have been battered by a multitude of exaggerated fears: Earnings are peaking, inflation is ready to explode, interest rates are preparing to go parabolic, tech is taking us through a 2000-like tanking, the simmering trade war will boil over into a global recession, and this stock market correction will morph into a new bear market.

Even though this correction will likely need to do more “backing and filling” before concluding, we don’t think investors should begin composing this bull market’s eulogy. We still project the S&P 500 to record a mid-single digit price gain by year-end, while enduring elevated volatility along the way.

We still are calling for a year-end 2,900 target on the S&P 500 which is 10% higher than the current level of 2,640.

The angle of ascent for the S&P 500’s year-over-year EPS growth is expected to peak in the third quarter of this year at 21.7%, but future-quarter growth is estimated to remain at or near 10% through Q4 2019. In addition, we see the 10-year yield averaging below 3.25% through mid-2019

Market Insights 4/24/2018

Mixed economic data and mixed earnings results from a number of Dow components coupled with angst over the rally in Treasury yields to form an unappealing recipe for investors to stomach, severely pressuring stocks in Tuesday’s session.

Treasuries were mixed, as the yield on the 10-year Treasury note hit 3.00% for the first time since 2014.

Strong Consumer Confidence and new home sales reports were met with some regional manufacturing data that surprisingly dropped into contraction territory. Crude oil prices and the U.S. dollar were lower, while gold was higher.

The Markets…

The Dow Jones Industrial Average tumbled 425 points (1.7%) to 24,024

The S&P 500 Index fell 36 points (1.3%) to 2,635

The Nasdaq Composite plummeted 121 points (1.7%) to 7,007

In moderate-to-heavy volume, 861 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.94 to $67.70 per barrel and wholesale gasoline was $0.03 lower at $2.10 per gallon

The Bloomberg gold spot price rose $7.38 to $1,332.21 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.2% at 90.77

Consumer Confidence surprisingly improves, new home sales and housing prices top forecasts

The Consumer Confidence Index rose to 128.7 in April, from March’s downwardly-revised 127.0, versus the Bloomberg estimate of a dip to 126.0. The Index moved closer to February’s 17-year high, as the Present Situation Index and the Expectations Index of business conditions for the next six months both improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—dipped to 22.9 from the 23.8 level posted in March.

New home sales rose 4.0% month-over-month (m/m) in March to an annual rate of 694,000 units, versus forecasts calling for 630,000 units and the upwardly-revised 667,000 unit pace in February. The median home price was up 4.8% y/y at $337,200. home inventory declined to 5.2 months of supply at the current sales pace from 5.4 in February. Sales fell m/m in the Northeast and were down in the Midwest, but ticked higher in the South and jumped in the West. New home sales are based on contract signings instead of closings.

The Richmond Fed Manufacturing Activity Index unexpectedly dropped to a level depicting contraction (a reading below zero), falling to -3 in April from 15 in March, versus estimates of a rise to 16.

Treasuries finished mixed, as the yield on the 2-year note declined 2 basis points (bps) to 2.45%, while the yields on the 10-year note and 30-year bond moved 3 basis points higher to 3.00% and 3.17%, respectively.

Treasury yields have had a recent run upward, with the 10-year note reaching 3.00% for the first time since early 2014, causing some choppiness for the stock markets after a rise last week that took them to near positive territory for the year. The U.S. dollar paused and the markets continue to grapple with concerns about tighter financial conditions and resurfacing inflation expectations, along with a solid start to earnings season and a continued strong economic backdrop.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 6.8% y/y gain in home prices in February, versus forecasts of a 6.4% rise. Month-over-month (m/m), home prices were up 0.8% on a seasonally adjusted basis for February, above expectations of a 0.7% gain.

The only item on tomorrow’s economic calendar is MBA Mortgage Applications.

Europe mixed on earnings and as concerns remain, Asia mostly higher

European equities finished mixed, with the host of mixed earnings reports on both sides of the pond being sifted through. The markets also continued to grapple with festering concerns about tightening financial conditions in the U.S. and another dose of disappointing economic data in the region.

The euro ticked higher and the British pound gained ground as the U.S. dollar paused from a recent run, while bond yields in the region traded mostly to the downside.

Stocks in Asia finished mostly to the upside despite the lackluster session in the U.S. yesterday, which came despite some upbeat economic data, which were offset by festering concerns about tightening financial conditions. Japanese equities advanced, with the yen’s steady decline boosting stocks, stocks traded in mainland China and Hong Kong saw sharp gains amid signs that the government is willing to ease its tightening campaign, per Bloomberg.

Markets in India continued a recent run by notching solid gains, while the lingering concerns toward the chip sector that has hamstrung technology stocks weighed on South Korean securities. Lastly, shares in Australia increased nicely, with strength in financials overshadowing a drop in resource-related issues.

Market Insights 4/23/2018

In choppy trading, U.S. equities finished with modest losses, as focus on the run in Treasury yields, which has taken the rate on the 10-year Treasury note very near the 3.00% mark for the first time in over four years, appears to be fraying investors’ nerves.

A busy week on the economic and earnings fronts got rolling, with Hasbro posting softer-than-expected results, while existing home sales and business activity reports topped forecasts.

The U.S. dollar added to its recent run, crude oil prices were higher, and gold was lower.

The Markets…

The Dow Jones Industrial Average declined 14 points (0.1%) to 24,449

The S&P 500 Index was nearly unchanged at 2,670

The Nasdaq Composite moved 18 points (0.3%) lower to 7,129

In moderate volume, 730 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.24 to $68.64 per barrel and wholesale gasoline was $0.03 higher at $2.13 per gallon

The Bloomberg gold spot price tumbled $11.64 to $1,324.72 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.7% at 90.93

Housing and manufacturing reports top forecasts

Existing-home sales in March rose 1.1% month-over-month to a 5.60 million annual rate, compared to the Bloomberg forecast of a 5.55 million pace, and versus February’s unrevised 5.54 million rate. Sales of single-family homes ticked 0.6% higher m/m, but were 1.0% lower than year-ago levels, while purchases of multi-family structures grew 5.2%, but the y/y pace remained lower. The median existing-home price was up 5.8% y/y at $250,400, marking the 73rd straight month of gains. Unsold inventory came in at a 3.6-months pace at the current sales rate, down from 3.8 months a year ago. Inventory of homes for sale climbed 5.7% m/m but was still 7.2% lower y/y. Sales declined in the South and the West, while the Midwest and Northeast saw solid gains. Existing home sales account for the majority of the housing sales market.

Lawrence Yun, Chief Economist at the National Association of Realtors (NAR) that releases the report, said a reversal from weather-impacted declines seen in February helped overall sales activity. However, Yun added that ” The unwelcoming news is that while the healthy economy is generating sustained interest in buying a home this spring, sales are lagging year ago levels because supply is woefully low and home prices keep climbing above what some would-be buyers can afford.” This was the second-straight monthly gain, but existing home sales are based on contract closings instead of signings and the recent grind higher in interest rates will likely have an impact on affordability going forward, which already remains under pressure.

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output surprisingly accelerated, rising to 56.5 in April from March’s 55.6 figure, versus estimates of a dip to 55.2. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector increased more than expected this month to 54.4 from March’s 54.0 figure, and versus forecasts calling for a slight rise to 54.1. Readings above 50 for both indexes denote expansion.

Treasuries were lower, as the yields on the 2-year and 10-year notes rose 3 basis points (bps) to 2.48% and 2.98%, respectively, while the 30-year bond rate ticked 1 bp higher to 3.14%.

Treasury yields have seen an accelerated upside move as of late, with the 10-year note flirting with 3.00% for the first time since early 2014, while the yield curve continues to flatten, and ample headlines have warned about imminent threats of an inversion and subsequent recession, history shows long lag times and healthy stock market performance. Liz Ann adds that she finds herself siding with the more benign views expressed by Fed officials about the flattening of the yield curve.

However, a Fed which is likely to raise rates three-to-four times this year coupled with now-tightening financial conditions and the flattening of the yield curve are likely to keep volatility elevated. Meanwhile, the U.S dollar has recently moved higher, and the stock markets stumbled late last week after a rally that took them to near positive territory for the year, with concerns about tighter financial conditions and resurfacing inflation expectations countering a solid start to earnings season and a continued strong economic backdrop.

Europe mostly higher on data, Asia mostly lower amid lingering concerns

European equities finished mostly higher, with the euro and British pound falling to lend some support as the U.S. dollar continued to grind higher, while the technology sector appeared to get a reprieve from a recent bout of softness.

The markets digested some mixed economic data in the region, and festering tightening of financial conditions in the U.S. added to the choppiness in the markets, which is likely to persist as earnings season heats up and the European Central Bank is expected to announce its monetary policy decision later this week. Markit’s preliminary April eurozone business activity reports showed growth in the services sector unexpectedly accelerated, but expansion for the manufacturing sector decelerated more than expected. Bond yields in the region were mostly higher. Economic data in Europe has seen a soft patch, adding to the festering volatility.

Stocks in Asia finished mostly lower, with the tightening financial conditions in the U.S. and persistent uneasiness toward the technology sector weighing on the markets, with earnings season heating up and some key central bank meetings in Japan and Europe later this week looming. Japanese equities declined, though losses were likely held in check as the yen extended a recent downward move.

Stocks in mainland China and Hong Kong declined, and those traded in South Korea edged lower. However, some strength in the financial sector helped markets in Australia and India to finish higher.

Random Thoughts

The S&P 500 Fell in 50% of Pre-Mid-Term Election Periods Since WWII

Early reports indicate that Q1 EPS growth will record its 25th consecutive quarter in which actual results outpaced end-of-quarter estimates.

Q1 S&P 500 EPS growth is now seen at 17.7% versus the 3/29 estimate of 16.7%. Also, Q2, Q3 and 2018 forecasts are above earlier expectations and show sequential gains. Yet based on recent market weakness, many investors probably wonder if 2018 will experience the traditional “Sell in May” seasonality.

If so, will the defensive groups finally come back into favor as they traditionally have since 1990?

The S&P 500 has usually experienced challenging times in the six-months leading up to the early-November mid-term elections, possibly due to the uncertainty associated with the change in the presidential party’s representation in congress.

Since 1946, the S&P 500 fell in price in 50% of all observations, declining an average 1.1% and slipping by double-digits in five of nine times. What’s more, the 500 dropped an average 3% in the six months prior to first-term mid-term elections, posting negative returns 60% of the time. At the same time, the party controlling the presidency lost an average of 22 seats in the House of Representatives and four in the Senate.

Not surprisingly, investors have typically anticipated the uncertainty associated with this mid-term mayhem by migrating toward defensive sectors. Specifically, the three S&P 500 sectors with the highest price returns and frequencies of outperforming the market in the six months prior to the mid-term elections included consumer staples, health care and real estate.

However, an equal exposure to these three groups, from April 30 through October 31 of mid-term election years, delivered an average return of 5.8% vs. a 1.5% decline for the S&P 500. In addition, this trio’s return beat the market in all seven observations. Of course there is no guarantee this pattern won’t get trumped in 2018.