Markets "In a Nutshell" for May 9, 2018May 09, 2018
Investment Week at a Glance
Stocks finished lower for the week. The Dow Jones Industrial Average was down 0.20%, the S&P 500 fell 0.24%, the New York Stock Exchange Composite (2,000 stocks) was down 0.80% and the average investors index (Value Line Index) was down 0.42%. Foreign stocks (DJ Global ex U.S.) were down 0.59%. Bond prices were higher for the week, pushing the yield on the 10-year U.S. Treasury down 1 basis point to finish the week at 2.95%. (Data sources: Barron’s Financial, Wall Street Journal)
Mixed Economic Signals Keep Markets Range Bound
A somewhat fuzzy global economic picture developed last week. In the U.S., better-than-expected results were reported in terms of initial jobless claims, the unemployment rate, factory orders and ADP employment. But nonfarm payrolls and the ISM manufacturing index disappointed.
International economic data was also mixed. Russia and China PMI, as well as Eurozone manufacturing PMI, came in better than expected. But UK manufacturing PMI, Brazil’s industrial production and Mexico’s GDP failed to meet expectations.
In the U.S. equity market, technology stocks outperformed following better-than-expected first-quarter earnings from tech bellwether Apple. Consumer staples underperformed, however, as rising input costs and limited pricing power squeezed quarterly results for companies in the sector.
Overseas, European stocks performed best due to continued accommodative monetary policy from the European Central Bank. But emerging markets equities struggled as the rising U.S. dollar hurt emerging markets’ currencies.
Global stock markets were generally flat for the week, despite some ups and downs around various corporate earnings announcements and geopolitical developments. Overall, markets at the moment seem to be range-bound with little direction. Small-caps performed well relative to large-caps, in part because they face less big-picture headline risk than do large-cap stocks. Growth stocks also outperformed value stocks for the week.
Bond Yields Flat Across the Curve
Bond yields were flat across the yield curve last week, with global stock indices and broad-based bond indices posting similar returns. Global stock indices continue to lead performance—up approximately 14% during the past 12 months, versus a slightly negative return for bond indices.
Within the bond market, there was little separation between sector returns. The 10-year U.S. Treasury yield remained below 3% and much of the recent economic data has been mixed—suggesting that the Federal Reserve Board may be able to take its time making monetary policy adjustments. We continue to favor corporate credits, but are a bit more neutral on duration.
The Federal Reserve Board’s preferred measure of inflation—core PCE—was released last week for the month of March. It showed that inflation over the past 12 months rose by 1.9%—in line with expectations, and 0.3% higher than the year-over-year figure for February.
The Fed statement following its policy meeting last Wednesday contained a few brief comments regarding inflation. The Fed stated that it would accept “symmetric” inflation around its target inflation rate of 2%—implying that a mild overshoot the target would not greatly concern them.
When does a bull market officially make the switch to a bear market?
a) When a market index drops 20% from its high.
b) When a market index falls 20% in a single day.
c) Whenever the chair of the Federal Reserve says so.
d) When a market index falls 50% from its high.
Have a good week!
Answer to quiz:
a) The S&P 500 is currently approximately 7% below its record close of 2872.87 on Jan. 26. If it were to close below 2298, the index would be 20% below the record, which would result in the first domestic bear market in almost a decade.