Sharp sell-offs on Monday and today wiped away gains from the middle of the week. Trade talk, disappointing jobs reports and Fed comments all led to today’s poor performance. For the week, the Dow declined 0.7% while the S&P 500 declined 1.4%.
Trade talk continued to dominate financial headlines this week. Trade fears fueled the sharp downturn on Monday, but by mid-day Tuesday rumors of behind-the-scene trade negotiations between the US and China eased concerns. But then Trump announced this morning he wanted to study the effects of another $100 billion in Chinese products subject to tariffs. It’s hard to understand the goal here. Trade is critically important to the US and global economy. This back and forth retaliation would be a large net loss for both the US and China, and yet here we are. Read More
The jobs report disappointed this morning, with the economy adding only 103k net new jobs in March. This was well below the 175k consensus estimate. Wage growth was reasonably strong though, growing at a 2.7% annualized rate. The jobs figures for January and February were also revised lower by a total of 50k jobs. The unemployment rate remained at 4.1%. While the jobs report was weaker than expected, Fed Chairman Powell stated this afternoon that the economy remains strong and ready for additional interest rate increases this year. Read More
I posted this on my business Facebook page yesterday. We’re over two months into the current market correction. Every correction is different and the issues driving them change, but it can be beneficial to study how past corrections behaved. I looked at the last four corrections to see how the current one compares in length and severity. This data suggests we’ve got several more months to go before working through this volatile period. It also shows that this correction (so far) has been pretty mild relative to others in the past decade. No one knows what the future holds, but if we have hit the bottom, we reached it significantly faster than the prior four corrections. We hit the low point 13 days after the late January high while the average correction has taken 138 days to set a bottom. We’re only 70 days from the all-time highs reached in late January. Over the past four corrections, it has taken an average of 268 days to exceed the prior high. You can see the chart here and follow me on Facebook if you’re interested.
Oil decreased 4.7% this week to close at $61.88/barrel. The yield on the 10-yr Treasury moved higher to 2.78% from 2.74% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.40% from 4.44% a week ago.
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Strong rallies on Monday and Thursday pushed stocks higher for the week. Concerns over a trade war dissipated and markets reacted to better than expected 4th quarter growth. The final estimate shows the US economy grew at an annualized rate of 2.9%. This is below the 3%+ rate of the last two quarters, but still significantly higher than the average of the first 16 years of this century. For the week, the Dow gained 2.4% while the S&P 500 increased 2.0%. While we ended the first quarter on a strong week, both the Dow and S&P 500 declined during the quarter. This broke a streak of straight positive quarters for the market. Markets are closed today in observance of Good Friday. Read More
Walmart is in early talks to buy health insurer Humana according to multiple reports. This follows CVS agreeing to acquire another health insurer, Aetna, in December. This could start a trend where we see insurers being consolidated into large businesses as the pressure to keep reducing healthcare cost intensifies. Stripping out layers of administrative costs seems like a positive, but consolidating purchasing power contains several risks. Drug research is very expensive and has a very low success rate. We currently have a lot of investment capital directed to drug research because the returns remain attractive. That means we do pay more for drugs, but we have a steady pipeline of new and better drugs. The risk of too much pricing pressure on drugs is less new drug research. On the flip side, we have an aging population and a growing need for doctors. While specialists are still well-paid, many family doctors’ earning potential has declined to the point where it’s hard to justify the time and financial investment of medical school. Additional pressure on that front could turn more of the best and brightest away from becoming doctors.Read More
Oil decreased 1.6% this week to close at $64.91/barrel. The yield on the 10-yr Treasury moved lower to 2.74% from 2.81% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.44% from 4.45% a week ago. After a steady climb this year, mortgage rates have been essentially flat for five weeks.
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Stocks declined on the week on news of some additional targeted tariffs towards China. China responded that it is preparing for a potential trade war. I don’t think we’re going to see a trade war, both sides have too much lose, but the concern is keeping pressure on stocks. For the week, the Dow declined 1.5% while the S&P 500 declined 1.2%.
While the markets were down this week, there was some positive economic news. The Labor Department reported there were 6.3 million job openings at the end of January. That’s the highest number on record. This follows last month’s strong jobs report which saw the economy add 313k net new jobs. The strong jobs figures could push the Federal Reserve to speed up interest rate increases this year. In the recent past, the fear of interest rate increases has caused stocks to sell-off, but that didn’t happen today. I think the market has come to terms with 2-3 interest rate increases this year and recognizes that it is an overall positive to the market and economy for the Fed to be in a position to raise rates. The Fed meets next week to discuss interest rate policy and it is largely expected that the Federal Funds rate will be increased 0.25%. Read More
The University of Michigan Consumer Sentiment survey reached a 14 year high this week. Tax cuts are increasing disposable income and should support continued consumer spending. Consumer spending makes up two-thirds of the US economy. Interestingly, people in the bottom third of incomes showed a sharp increase in sentiment, while those in the top third saw a decline. The reaction to the tariff announcement could explain part of this divergence. Lower income people, many of whom have experienced manufacturing jobs moving overseas view the tariffs as a way to improve their job situation and prospects. Whereas higher income Americans might be more concerned about higher consumer prices and the broader impact on the economy from higher taxes on goods. Read More
Oil increased 0.3% this week to close at $62.26/barrel. The yield on the 10-yr Treasury moved lower to 2.85% from 2.90% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.44% from 4.46% a week ago. This was the first decline in mortgage rates in 2018.
Stocks rode a strong jobs report and a partial rollback of the steel and aluminum tariffs to a great week. The Dow gained 3.3% while the S&P 500 increased 3.5%. While these strong weeks are nice, the volatility continues. This was the 4th week out of the last five that saw the Dow increase/decrease by more than 3%. For comparison, prior to this stretch the Dow went 59 straight weeks without a move greater than 3%. The Dow remains almost 5% below its all-time high while the S&P 500 is 3% below its all-time high.
The February jobs report showed the US economy added 313k net new jobs last month, significantly above the consensus expectation of 200k new jobs. Skilled labor positions, including construction and manufacturing, saw its best three-month period since 1984. The labor force participation rate increased to 63% while the unemployment rate declined to 4.0%. Wage growth was relatively modest at a 2.6% annualized rate. Interestingly, this was taken as a positive by many investors as a sign that inflation pressures remain contained. One of the issues that sparked the sell-off in late January was concerns about rising inflation and interest rates. This report, while only one data point, provided comfort that we aren’t looking at raising inflation for the moment. Along those lines, we also saw a large increase in the labor force from people returning to work who were no longer counted as unemployed. I’ve talked about the shadow labor supply in the past and it is this supply that has held wages in check even as the economy continues to add jobs. Read More
Tariffs on steel and aluminum sparked fears of a trade war last week. Like most market participants, I was hopeful that the blanket tariffs discussed wouldn’t actually come to pass. One of things we’ve seen with Trump is him making large, absolute statements to generate headlines, then dialing back into a more modest approach when final announcements are made. Importantly in this tariff debate, Canada and Mexico have been excluded from the tariffs. Canada and Mexico are the 1st and 3rd largest exporters of steel to the US. Coupled with US production this means the amount of steel actually subject to the tariff is a small portion of the total US consumption of steel. Treasury Secretary Steven Mnuchin has hinted that even more countries might be excepted in the future as well. That’s a big plus in my opinion. Read More
Oil increased 1.2% this week to close at $62.09/barrel. The yield on the 10-yr Treasury moved higher to 2.90%. The average rate on a 30-yr fixed rate mortgage moved higher again to 4.46% from 4.43% a week ago. Mortgage rates have now increased every week in 2018.
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