4/13/18 – Stocks Bounce on Xi Comments

Earlier this week, Chinese President Xi Jinping stated China would consider changes to its import tariffs on some US goods. The headline soothed investors as it appears the world’s two largest economies would find common ground and avert a trade war. The headlines were more positive than some of the details, but it still suggests negotiation will win the day and both sides will avoid the pitfalls of a trade war. The news helped push stocks higher for the week, with the Dow gaining 1.8% while the S&P 500 increased 2.0%. Both indices remain negative on the year.

Earnings season kicked-off today with several major banks reporting this morning. JP Morgan, Citibank and Wells Fargo all reported better than expected earnings, but saw their stocks trade down on the news. Stock behavior around earnings is always a wild card, but today’s down trade suggests the market as a whole was more optimistic about earnings than wall street analysts. While the headline numbers looked good, there were some concerning aspects of these reports. Lending wasn’t overly robust and trading revenue wasn’t as strong as many expected given the market volatility.¬†Read More

This is the first quarter of earnings since the new tax law went into effect. This is creating more uncertainty than usual. While tax rates were lowered, some rules around deductions changed and so estimating earnings was more difficult than normal. This could lead to a divergence in actual results versus estimates and some additional volatility than normal for an earnings period. Next week, blue chips such as Johnson & Johnson, American Express, Proctor & Gamble, IBM and others report 1st quarter earnings. Over the next three weeks, most of the companies in the S&P 500 will report earnings. Earnings is always a good time to get a sense of how companies are performing and what they think about the state of the overall economy.

Oil increased sharply this week, rising 8.7% to close at $67.25/barrel. The yield on the 10-yr Treasury moved higher to 2.82% from 2.78% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.42% from 4.40% a week ago.

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