- Fears of a full-blown trade war have played a lead role in driving this latest bout of volatility. While this situation could linger and weigh on investor sentiment for some time, we are encouraged that the value of goods under the new tariffs (less than $40 billion) is dwarfed by the amount of additional stimulus being put into the economy this year (estimated at $700-800 billion). We do not expect a full-blown trade war and have become optimistic as signs of compromise have emerged. Beyond trade actions, policy uncertainty is increasing as the midterm elections approach. Historically, midterm election years have been more volatile.
- Strong market returns coming off of the February 2016 lows were achieved with virtually no volatility, but a historically long period without a correction left the market more vulnerable to negative catalysts, several of which emerged in recent weeks, leading to the ongoing correction. Recent stock declines and increasing earnings estimates have pulled the S&P 500 Index price-to-earnings ratio down to near 16 on a forward 12-month basis– its lowest level since November 2016. With inflation and interest rates still low, we believe valuations are well supported at these current levels and still expect double-digit earnings gains throughout 2018 with an accompanying pickup in economic growth as the full impact of the new tax law kicks in. Also, corporate buybacks (or a lack thereof) may have removed some buying support temporarily and facilitated the indiscriminate selling as companies remain on the sidelines about five weeks prior to reporting quarterly earnings.
- High-quality fixed income has held up well during recent equity market weakness. From March 9 through April 2, 2018, the total return for the S&P 500 has been -7.3%, while the Bloomberg Barclays U.S. Aggregate Index has returned 0.8%, exemplifying its role as a ballast for equity market risk. This comes after a difficult first quarter for fixed income, with rates rising materially across the yield curve as markets priced in more growth, inflation, and a slightly more aggressive pace of Federal Reserve rate hikes. We look back at the first quarter of 2018 and what that may mean for the remainder of the year in fixed income markets, in this week’s Bond Market Perspectives, due out later today.
- Concerns of increased regulation in the technology sector, the S&P 500’s largest, have weighed on sentiment. After the strong multi-year run for technology, crowded positioning may be exacerbating the sector’s negative reaction to privacy concerns, but the earnings outlook for the group remains positive.
- The economy appears sound and shows only preliminary signs of the cycle of overconfidence, overborrowing, and overspending that typically precede a recession. Our favorite leading indicators continue to suggest a low probability of a recession in the next year–particularly in the credit markets, which have remained generally well behaved and have signaled only a slight increase in financial market stress and minor tightening credit conditions. A jump in the prices paid component of the Institute for Supply Management (ISM) Index for March may have fanned inflation fears yesterday and contributed to the sharp sell-off, but as we noted on our blog last week, the Federal Reserve’s preferred inflation measure remains well below its 2% target at 1.6%, and the manufacturing reading in the ISM Index remains very strong near 60 and is indicative of earnings gains ahead.
- Wards Vehicle Sales (Mar)
- Germany: Retail Sales (Feb)
- Italy: Markit ADACI Italy Mfg. PMI (Mar)
- France: Markit France Mfg. PMI (Mar)
- Germany: Markit Germany Mfg. PMI (Mar)
- Eurozone: Markit Eurozone Mfg. PMI (Mar)
- UK: Markit UK Mfg. PMI (Mar)
- Russia: GDP (Q4)
- Japan: Nikkei Japan Services PMI (Mar)
- China: Caixin China Services PMI (Mar)
- MBA Mortgage Applications (Mar 30)
- ADP Employment Change (Mar)
- Markit Services PMI (Mar)
- ISM Non-Manufacturing (Mar)
- Factory Orders (Feb)
- Durable Goods Orders (Feb)
- Cap Goods Shipments & Orders (Feb)
- Bullard (Dove)
- Mester (Hawk)
- Eurozone: Unemployment Rate (Feb)
- Eurozone: CPI (Mar)
- Challenger Job Cuts (Mar)
- Weekly Jobless Claims (Mar 31)
- Trade Balance (Feb)
- Bostic (Dove)
- Germany: Factory Orders (Feb)
- Italy: Markit ADACI Italy Services PMI (Mar)
- France: Markit France Services PMI (Mar)
- Germany: Markit Germany Services PMI (Mar)
- Eurozone: Markit Eurozone Services PMI (Mar)
- UK: Markit UK Services PMI (Mar)
- Eurozone: PPI (Feb)
- Eurozone: Retail Sales (Feb)
- RBI: Repurchase Rate (Apr 5)
- ECB: Monetary Policy Meeting Accounts
- Change in Non-farm, Private & Manufacturing Payrolls (Mar)
- Unemployment Rate (Mar)
- Average Hourly Earnings (Mar)
- Average Weekly Hours (Mar)
- Labor Force Participation & Underemployment Rates (Mar)
- Consumer Credit (Feb)
- Germany: Industrial Production (Feb)
- Japan: Leading Index (Feb)
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