Market Update: Tuesday, February 20, 2018

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Market Recap

  • U.S. markets inched higher in mixed Friday trading. S&P 500 Index closed up more than 4% for the week, biggest weekly gain in five years. S&P 500 +0.1%, Dow +0.1%, Nasdaq -0.2%, Russell 2000 +0.4%.
  • Utilities (+0.8%) led as rates eased modestly; consumer discretionary (-0.4%) lagged after several apparel makers posted disappointing earnings.
  • Positive breadth on NYSE (1.4:1) trading volume below average (~95% of 30-day avg.).
  • Treasuries firmed slightly. 10-yr. note yield -2 basis points (-0.02%) to 2.86%.
  • Commodities: WTI crude oil +0.5% to $61.64/bbl., COMEX gold -0.3% to $1350/oz., dollar firmed against major crosses.
  • Economic data: February’s Consumer Sentiment Index soundly beat expectations (99.9 vs. 95.5). U.S. Commerce Department made waves by recommending import quotas and tariffs on steel and aluminum imports from certain countries; decision timeline set for mid-April.

Overnight & This Morning

  • Domestic equities opened lower, after last week’s big rally.
  • European stocks mixed to higher. U.K. industrial trends came in stronger than expected, providing a modest tailwind. STOXX Europe 600 +0.2%, DAX +0.2%, FTSE 100 -0.1%.
  • Most Asian markets lower as market participants return from Lunar New Year holiday. China remains closed until Thursday. Nikkei -1.0%, Hang Seng -0.8%.
  • Treasuries weaker from Friday’s close; 10-yr. yield +5 basis points (+0.05%) to 2.91%. The 10-yr. note continues to hold tight near the 3% area.
  • Commodities: Oil higher overnight (+0.6% to ~$61.93/bbl); gold -1.1% to ~$1341/oz.; industrial metals lower overall.
  • Economic releases: No major releases after the President’s Day holiday.

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Macro Notes

  • Estimates continuing to rise as earnings season winds down. With about 80% of S&P 500 companies having reported fourth quarter 2017 results, earnings growth is tracking to a 15% year-over-year increase, 3% better than expectations on January 1. Quarterly revenue has been even more impressive, tracking to an 8% year-over-year increase, a full 1% above January 1 expectations. Beat rates for earnings and revenue are both well above average at 76% and 78%, respectively. After rising 3% last week, earnings estimates for 2018 are now up 7% since January 1 (they usually fall during earnings season), and reflect a 19% increase over 2017 levels. The increase in estimates, the biggest since FactSet began tracking them 22 years ago, reflects the impact of the new tax law, steady global growth, and the weak U.S. dollar.

  • Steady growth continues. Inflation data stole headlines, but reports on retail sales, manufacturing, and consumer sentiment were also released last week. Though the economic reports were a mixed bag relative to expectations, the overall story that economic data and earnings continues to tell is one of steady growth in the United States, which should provide a positive fundamental backdrop for markets in the near term. We discuss these latest data points and the current state of the U.S. economy in more detail in this week’s Weekly Economic Commentary, due out later today.
  • Yield curve flattens as rates continue to rise. Although longer maturity Treasury yields rose, shorter-maturity yields outpaced that rise, as investors continue to price in an increasingly aggressive Federal Reserve rate hike schedule in 2018. Slowly firming inflation pressures are one of the main causes, as is the overall positive trajectory of U.S. economic data. We maintain our 10-year Treasury yield target of 2.75-3.25% to end 2018, as rates slowly continue higher with volatility during the year. In this week’s Bond Market Perspectives, due out later today, we look at previous periods of rising rates, identify which fixed income sectors have held up better during those times, and pinpoint other ways to potentially help reduce the headwinds of rising rates on fixed income portfolios.
  • Best week in years. The S&P 500 gained 4.3% last week, for the best weekly gain since early 2013. Of course, this comes on the heels of a 5.2% drop the week before. Nonetheless, after the quickest move to a 10% correction from a new high ever (9 days) for the S&P 500, the recent bounce is quite impressive. On Friday, the S&P 500 sold off late, but still managed to close green, extending the win streak to six days in a row. It hasn’t made it to seven in a row since an eight-day win streak in October 2017.
  • Are we out of the woods yet? After the fastest correction from a record high in the history of the S&P 500, stocks staged an impressive comeback rally last week. But does that mean we are out of the woods? We explore the answer to this question in our latest Weekly Market Commentary, due out later today. We also examine the historical relationships between stocks and interest rates, and stocks and inflation, the primary areas of concern for investors. History suggests stocks and yields can move higher together at current rate levels, and that stock valuations are justified based on current inflation levels.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • Germany: PPI (Jan)
  • Germany: ZEW (Feb)
  • Eurozone: ZEW (Feb)
  • Eurozone: Consumer Confidence (Feb)
  • UK: Retail Sales (Jan)
  • Japan: Machine Tool Orders (Jan)
  • Japan: Nikkei Japan Mfg. PMI (Feb)
  • Japan: All Industry Activity Index (Dec)

Wednesday

  • Markit Mfg. & Services PMI (Feb)
  • Existing Home Sales (Jan)
  • FOMC Meeting Minutes
  • France: Markit France Mfg. & Services PMI (Feb)
  • Germany: Markit Germany Mfg. & Services PMI (Feb)
  • Eurozone: Markit Eurozone Mfg.  & Services PMI (Feb)
  • UK: Jobless Claims & Unemployment Rate (Jan)

Thursday

Friday

  • Germany: Imports & Exports (Q4)
  • Germany: GDP (Q4)
  • Eurozone: CPI (Jan)
  • Mexico: GDP (Q4)
  • Canada: CPI (Jan)
  • China: Property Prices (Jan)

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

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