- Lots of information, but not much market movement. Stocks edged lower. Bonds mostly flat.
- The moderate employment report is consistent with FOMC’s “gradual” approach.
- Q1 earnings growth is 80% complete and 79% of companies have beaten profit estimates.
- Policy: More trade talks. Fewer trade threats. The negotiation phase appears to be underway.
- Coming Week: More earnings. More negotiations. The CPI is the only notable economic report.
Lots of information, but not much market movement. Stocks edged lower. Bonds mostly flat.
Stocks struggled for much of the week before partially recovering Friday. The S&P 500 slipped -0.21% weighed down by declines in eight of the eleven sectors, particularly telecom and consumer staples. International and emerging market stocks also fell, but small cap stocks posted a moderate gain and have outperformed the S&P 500 by roughly 2% so far this year.
The bond market was also relatively quiet. The yield on the 10-year Treasury note settled a smidgen lower at 2.95%, helping the benchmark Bloomberg/Barclays Aggregate Bond Index inch 0.02% higher. In other markets, oil prices moved higher on heightened Middle East / Iran tensions that could reduce oil supplies. The value of the dollar rose again in the latest week and is now back in positive territory year to date. Higher oil prices are good for energy producers, but a stronger dollar is a headwind for exporters.
The moderate employment report is consistent with FOMC’s “gradual” approach.
The two big macro updates were the results of the Federal Open Market Committee (FOMC) meeting on Wednesday and the April employment report on Friday. The softer than expected jobs gain suggests to Via Nova that the Fed could stick to its plan to raise interest rates just two more times in 2018.
First, the FOMC left the federal funds rate, its primary monetary policy tool, unchanged as expected. In the post-meeting statement, “The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” The vote was unanimous. There was no post-meeting press conference, so the markets were left to speculate on what might come next.
On Friday, the April jobs report was a mixed bag, despite a drop in the unemployment rate to a 17-year low. Total employment and average hourly earnings, the two most important metrics in the report, rose less than expected, suggesting the economy is not yet overheating and that wage inflation remains manageable. Importantly, this report was consistent with the “gradual” approach to raising interest rates outlined by the Fed and, in our view, suggests that the two additional rate hikes currently projected by FOMC members is still the best bet.
Q1 earnings growth is 80% complete and 79% of companies have beaten profit estimates.
After another busy week of reports, expectations are that first quarter earnings will have grown at least 25% compared to a 12% forecast at the beginning of the year. Revenue is also expected to grow faster than previously thought; 8.4% versus 6.9% on January 1. Not surprisingly, there is a greater percentage of companies exceeding sales and profits estimates than usual. Energy, technology and financial companies reported the highest earnings growth, so far, while real estate and consumer staples brought up the rear.
Questions are being asked if this sharp rise in earnings is the peak for this cycle. Is this as good as it gets? Clearly, tax reform was a shot in the arm for most companies and is being reflected in the Q1 reports, but analysts’ earnings estimates for the remainder of 2018 remain quite robust; 20% in the second quarter, 22% in the third and 19% in the fourth. We believe the cut in tax rates will continue to help corporate profit margins and consumer spending in the quarters ahead, and that profits growth could remain healthy for some time.
Policy: More trade talks. Fewer trade threats. The negotiation phase appears to be underway.
The Trump administration delayed a decision about whether to impose steel and aluminum tariffs on the EU, Canada and Mexico until June 1, giving our key allies a reprieve as the countries carry out further negotiations.
Trade talks began between the U.S. and China. Reportedly, the U.S. requested China reduce the bilateral trade deficit by at least $200B by the end of 2020, as well as halt all government support for advanced technologies. The Chinese called these measures “unfair," and came up with their own list of demands.
Via Nova believes the negotiations will ultimately bear fruit for the U.S., but the “harvest” is likely to be small as all sides jockey for a face-saving solution. The macroeconomic impact of any agreements may not be substantial, but a lessening of tensions could be a significant positive for a nervous stock market.
The Iran deal is also on watch. Oil prices rose after Israel's Benjamin Netanyahu made a presentation claiming Tehran was lying about its nuclear capabilities, raising expectations the U.S would pull out of the accord. Crude oil prices have risen 7½% so far this year.
Coming Week: More earnings. More negotiations. The CPI is the only notable economic report.
There are still over 90 companies in the S&P 500 yet to report first quarter earnings. However, any surprises will likely be on a company level and are unlikely to significantly affect the estimated 25% growth in total corporate earnings. Instead, investors could focus on any developments related to the trade negotiations. The consumer price index is the only major economic report due in the coming week, and it is unlikely to be a major market mover.