• The current bull market celebrated its ninth anniversary.  The NASDAQ posted a record close.
  • Softer tariffs, new talks with North Korea and stronger job growth helped lift stocks.
  • A few snippets on fourth quarter earnings.
  • Trump two-fer: Trade tariffs were less severe than expected, and Trumps agrees to attend unprecedented talks with North Korea.
  • Watch for the February CPI report due Tuesday.
Market Update 030918.png

Happy Anniversary!  The current bull market celebrated its ninth anniversary.  The NASDAQ posted a record close.  Softer tariffs, new talks with North Korea and stronger job growth helped lift stocks.

The S&P 500 rose almost 3.6% in the latest week, thanks to a strong and steady rally following the better than expected February employment report.  Softer than expected tariffs on steel and aluminum, along with an announcement of plans to talk with North Korea about denuclearization added to optimism. Pro-cyclical sectors like technology, financials and industrials led the advance.  Bond yields rose a bit on the news, but the increase was somewhat muted, in part to only a modest increase in wage growth.

Including dividends, the S&P 500 gained nearly 400% since the market bottom on March 9, 2009.  More information on the current bull market can be found by clicking on Happy 9th Anniversary.

A strong February employment increase, but more modest wage gains – the perfect combination.

Nonfarm payroll employment surged by 313,000 in February, according to the Bureau of Labor Statistics.  This increase was well above the 200,000 consensus estimate.  Other components in the report also looked stronger.  Average hours worked edged higher as did manufacturing overtime hours.  The percent of employers hiring jumped to nearly 70%, and the labor force participation rate ticked up, though this metric remains historically low.  However, the unemployment rate remained steady at 4.1%, due to an 806K jump in the number of people looking for work.  This labor force surge dwarfed the 160K average increase over the past year and was the largest one-month increase in the labor pool since 1983 (outside months that included one-time Census hiring).  Willingness to re-enter the labor force suggests optimism about finding employment. 

While job growth was noticeably higher, and the unemployment rate was at a cyclical low, wage growth remained relatively tame at 2.6% year-over-year.  Limited wage and inflation pressures could allow the Federal Open Market Committee (FOMC) to stick to its current plan to raise interest rates three times this year instead of four.  However, looking ahead, this view could change if there is an upside surprise in Tuesday’s CPI release.

The components in the employment report give us an early read on other economic indicators that arrive later in the month.  More people working longer hours suggests we are likely to see another healthy increase in personal income and additional gains in industrial production.  All this is consistent with the recent rise in consumer and business confidence surveys.

A few snippets on 4th quarter earnings.

FactSet compiled some interesting tidbits on the fourth quarter earnings season.

·        With 99% of companies reporting, fourth quarter 2017 earnings rose 14.8% from a year ago, the highest growth since third quarter 2011.

·        S&P 500 companies posted 8.2% fourth quarter revenue growth; the highest since fourth quarter 2011.

·        The energy sector posted the highest earnings quarter growth at 105%.

·        77% of S&P 500 companies reported sales that exceeded estimates; the highest since FactSet began tracking the metric in 2008.

·        “Tax Reform” was mentioned at least once in 383 earnings calls of S&P 500 companies between December 20 and March 5.

·        For the fourth quarter, 28 of 30 companies in the Dow Jones Industrial Average reported non-GAAP earnings in addition to GAAP EPS, with most citing the impact of tax reform.

Policy: Trump’s Two-fer.  Promised trade tariffs spare NAFTA partners for now.  Trump agrees to attend an unprecedented meeting with North Korea.

First, the “Tariff Tantrum” hanging over the markets and dominating the airwaves fizzled, after last-minute negotiations and urgings prompted a watering down of the announcement.  NAFTA partners, Canada and Mexico, were exempted from the 25% (steel) and 10% (aluminum) tariffs, while negotiations continue.  Military allies were also invited to apply for exemption.  The risks of fallout and retaliation remain, but markets were pleased that the order was less severe than expected.

Second, Trump accepted an invitation (delivered by a South Korean representative) to meet with North Korean leader Kim Jong Un.  While no date or location has been set, the meeting would be the first time a serving U.S. president has sat down with the leadership of the “rogue” nation.  Mr. Kim confirmed that he was prepared to suspend nuclear weapons and missile tests and agreed to discuss eliminating his nation’s nuclear arsenal.  He also indicated North Korea would not object to U.S.-South Korean military maneuvers, scheduled to take place next month.  The announcement generated worldwide surprise and skepticism.  Tokyo expressed support for Mr. Trump, but within hours of the summit announcement, Prime Minister Shinzo Abe said he would travel to Washington for meetings with the White House on North Korea.  The proposed meeting could be a foreign policy coup and a market positive, if successful, or an unprecedented disaster, if it fails.

Coming Week: The economic calendar is full, but watch the CPI.

The consumer price index for February is due Tuesday and is expected to show a more moderate 0.2% increase compared with the 0.5% jump in January.  As noted earlier, the CPI could be a market-moving report.  With job gains running well ahead of Federal Reserve expectations, an increase in inflation above consensus may raise the odds of a fourth rate hike this year.  Retail sales will be reported Wednesday, the Philadelphia Fed survey on Thursday, capped off with housing starts and industrial production on Friday.  These reports will offer a somewhat clearer picture of first quarter economic momentum.  The Atlanta Fed’s GDPNow estimate of first quarter GDP currently stands at 2.5%.