HIGHLIGHTS:
- Stocks higher, but policy cross-currents and tensions continue.
- The economic data was better than expected.
- Q1 earnings growth estimates rose again.
- Follow up: Wells Fargo fined $1 billion by regulators.
- Policy concerns continued to weigh on the markets.
- Coming Week: More earnings. The first estimate of Q1 GDP is due Friday. Forecasters are looking for a 2.0% annualized increase.
Stocks higher, but policy cross-currents and tensions continue.
Lately, equity investors have been hesitant to hold trading positions over the weekend for fear of some adverse tweet or policy announcement from the U.S., China, Russia or the EU. The S&P 500 sold off on Friday, again, but managed to hang onto a moderate gain for the week lifting the index back into slightly positive territory year-to-date. The S&P 500 remains in a trading range this year as investors sort through the many positives (economic and earnings) and negatives (trade and monetary policy).
Recent history suggests that the market uncertainty could continue a while longer. There have been four corrections prior to the current one since the start of the bull market in 2009, according to BTIG analysts. The fastest recovery back to the previous high was 157 days back in 2012. The current correction has gone for just 84 days. Patience is a virtue that is in short supply on Wall Street, unlike nervousness.
Energy stocks led the advance helped by a further rise in the price of oil to the highest level since late 2014 on reports of higher demand, falling inventories and continued production caps by OPEC. Financials also turned in an above average return helped by strong earnings and a rise in the 10-year Treasury yield near the highest of the year. Consumer staples stocks were weakest with a -4.21% drop.
On the bond side, the rise in the 10-year Treasury yield helped push down the Bloomberg/Barclays Aggregate Bond index -0.65%. Bond returns continue to trail stock returns, but have turned slightly negative in 2018. The investment-grade bond index has fallen -2.42% since the beginning of the year and was off -0.57% from a year ago. Gold prices slipped for the week, while the value of the dollar rose.
The economic data was better than expected.
The markets received a healthy dose of economic data across a wide variety of sectors, and most all of it was better than expected. Retail sales rose 0.6% in March, comfortably ahead of the 0.4% expected increase. Housing starts and industrial production also beat expectations. The Philadelphia Fed Survey for the month of April rose more than forecast reflecting business optimism. The Philly Fed survey is of value to investors, not only because it covers the current month and is therefore more recent than other indicators, the industry mix in the survey is closer to the national average providing an early read on national economic momentum. The only “disappointing” report was that the leading indicators index rose by a smaller amount than expected, but the increase suggests limited downside risks to the economy at present.
Q1 earnings growth estimates rose again.
There was more positive news on corporate profits. First quarter earnings are now expected to increase 20.0% from Q1 2017 compared to an 18.6% increase forecasted a week ago, according to Thomson Reuters. Of the 87 companies in the S&P 500 that have reported earnings to date, 79.3% reported earnings above analyst expectations, compared with the long-term average of 64%.
ESG Follow up: Wells Fargo fined $1 billion by regulators.
Regulators levied a $1 billion fine against Wells Fargo on Friday related to the bank’s failure to adequately monitor and identify problems in its dealings with clients, including improper charges to customers in its mortgage and auto-lending businesses. The bank is also required to submit a plan to compensate the affected individuals within 120 days. The amount of restitution paid will be in addition to the fine. For additional background on this breakdown in corporate governance, please refer to the Via Nova article entitled Wells Fargo in the “Penalty Box.”
Policy concerns continued to weigh on the markets.
Russian Sanctions: The sanctions on Russia appear to be hitting home. Aluminum producer Rusal was unable to meet all its deliveries on time, helping push aluminum prices sharply higher.
TPP: President Trump looked at re-entering the Trans-Pacific Partnership (TPP), but decided it was not in America’s best interests.
Supreme Court: In a challenge to online retailers that do not collect sales taxes, South Dakota made its case to the Supreme Court to overturn a 1992 ruling not requiring companies to collect sales taxes on online sales if they did not have a physical presence in the state. This case is a challenging one, in our view. Since the initial ruling, online sales have grown to be a dominant force in the retail market, and there is a lot of potential tax costs/revenue at stake for companies, states and localities. States collect sales taxes from brick-and-mortar retailers, so why not online sellers? The other side of the issue is that, in addition to raising costs to small start-up firms requiring them to comply with multi-state tax regulations, if a state can impose taxes on a non-resident company, can the state impose other regulations and restrictions? A decision is expected in June.
North Korea: In the category of something possibly going right, North Korea and South Korea established a direct phone line. North Korea said it will halt its nuclear testing, and is considering the release of three U.S. detainees.