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Week in Review

Week Ending: Friday, April 6, 2018

Recap & Commentary

The U.S. stock market continued its volatile run, ending the week in negative territory as investor sentiment ebbed and flowed on news of the ongoing spat with China over global trade. President Donald Trump also continued to attack Amazon on Twitter, but the effect was less pronounced.

As it relates to daily market action, stocks sold off Monday following China’s announcement that it would impose $3B in retaliatory tariffs targeting +130 US products concentrated in agriculture in response to Trump’s proposed steel and aluminum tariffs. On Tuesday, the Trump administration responded, publishing a list of some 1,300 Chinese products worth ~$46B (largely finished goods rather than inputs) that it proposes to hit with 25% tariffs. The next day, China again followed suit by producing a list of additional tariffs worth ~$50B across 106 US import categories, focused on industries with powerful lobbies, and products from politically sensitive states. It’s important to note, however, that while tariffs have been threatened and specific industries were listed, neither country has taken action on their proposals.

Q1 earnings draw a more rosy picture of the stock market’s health. To date, according to FactSet data, the number of companies issuing positive EPS guidance is well above its five-year average, while the number issuing negative guidance is well below.

Economic Bullet Points

Data out of the factory sector was largely positive. The ISM Manufacturing Index slipped from February’s 14-year high but remains very strong. Strength in orders points to a good chance that the index could return to its February highs. Factory Orders benefitted from a large jump in aircraft, but more importantly, core capital goods orders and shipments were also up strongly—the latter a direct GDP input—which will help first quarter business investment.

Similarly, data outside of the factory sector indicated strength. Employment was a key contributor to the ISM Non-Manufacturing Index which, despite a slight pullback from last month’s outsized gain, remains elevated. Y/Y Construction Spending is subdued, though gains in single-family homes are a solid positive for the housing market, and should help to bolster expectations for a rise in housing supply.

The nation’s International Trade deficit deepened once again in February, the fourth straight month of an over $50B deficit. Though strong overseas demand is positive, net exports are becoming an increasing drag on GDP.

Nonfarm payroll growth for March of 103K was well below the 175K consensus expectations, but overall the Employment Situation report was contiguous with a strong labor market. Average hourly earnings rose tangibly, up 0.3% in the month, which lifted the Y/Y growth rate to 2.7%. Unemployment held steady at its very low 4.1%. Initial Jobless Claims popped higher in the month, however, with no special factors in the report, it is not expected to change the trajectory of labor market growth.

Consumer spending was soft in February, partially due to consumer reluctance toward credit card spending. Consumer Credit was ~$5B lower than last month, and below even low expectations, largely the result of weakness in revolving credit. These trends point to a more cautious consumer and may hint at a smaller contribution to GDP by the consumer for the first quarter.

Of Note

For the first quarter, the S&P 500 saw 23 days with a +/- 1% move. Dating back to 1958, the average is just 13 days.

Market Indices Week of 4/6

S&P 500                       -1.4%

Russell 2000                -1.1%

MSCI EAFE                  0.4%

MSCI EM                     -0.8%

Commodities            -0.6%

Barclay’s Agg.            -0.1%

US Dollar Index          0.0%

10-Yr Yield                  2.78%

WTI Oil ($/bl)                $62

Gold ($/oz)                  $1,331

The Week Ahead

  • NFIB Small Bus. Optimism
  • Producer Price Index
  • Consumer Price Index
  • Consumer Sentiment
  • Jobless Claims

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