- A mixed week for stocks. The large cap S&P 500 slipped, but the small cap Russell 2000 hit a record.
- Solid economic data points to continued growth ahead.
- Trade turbulence still a brick in the “wall of worry.”
- Coming Week: Home sales and durable goods orders are due, but the focus will be on trade talks and the FOMC meeting minutes.
A mixed week for stocks. The large cap S&P 500 slipped, but the small cap Russell 2000 hit a record.
The major equity indexes took something of a breather in the latest week, following two consecutive gains that lifted the S&P 500 back into positive territory for the year. Trade and geopolitical risks appeared to be the dominant topics of conversation. At Via Nova, we have described the risks facing the economy and the stock market as a “wall of worry;” events that might happen to potentially offset the positives of a healthy economy and accelerating corporate earnings growth. Markets tend to “climb” this wall of worry.
The S&P 500 fell -0.47% in the week as trade tensions and the recent rise in the value of the dollar were headwinds for the large cap S&P 500 index, where most companies are significantly involved in international trade. In contrast, small cap stocks, which are more domestically focused, rose 1.27% to record highs, reflecting the benefits of a strengthening economy and improved profits margins from tax reform. We believe that the strength in small cap stocks is more reflective of the underlying market trend, which remains positive.
In the bond market, the yield on the 10-year Treasury note finally pushed up through 3% to the highest level since 2011. When bond yields rise, bond prices fall, and the Bloomberg Barclays Aggregate Bond Index lost -0.48%, and was off nearly -1.41% over the past year. In other markets, Middle East turmoil continued to prop up oil prices, but other commodities such as gold, declined. The dollar rose.
Solid economic data points to continued growth ahead.
The latest week was filled with a variety of economic reports covering consumer spending, housing and industrial production. Except for a weather-related miss in housing starts, the data either met or surpassed expectations. Retail sales continued to improve, initial jobless claims hovered at a 45-year low signaling a healthy labor market, production was higher than expected in April and business surveys by the New York and Philadelphia Feds were strong. In addition, the forward looking leading indicators index rose yet again suggesting continued economic momentum in the months ahead. Indeed, the Atlanta Fed’s real time reading of these data points, GDPNow, currently suggests a 4.1% growth rate in the second quarter, well above the 2.3% first quarter increase.
Trade turbulence still a brick in the “wall of worry.”
Trade negotiations continued in the latest week, with Chinese representatives taking a turn coming to the U.S. The talks so far have not produced an agreement, which raises market fears of a possible trade war.
To repeat, Via Nova’s most likely scenario assumes no significant trade disputes which would reduce corporate sales and revenue as well as lift domestic inflation.
Coming Week: Home sales and durable goods orders are due, but the focus will likely be on trade talks and the FOMC meeting minutes.
The economic calendar will be lighter in the coming week. On the economic front, new and existing home sales will be of interest, but are not expected to have a major market impact. However, the April durable goods orders report due Friday could help provide a clearer picture on capital spending as we begin the second quarter.
However, the focus will likely remain on policy. The trade talks, Iran sanctions and a potential meeting with North Korea will have market-moving potential, though there are no fixed deadlines for a resolution. On the monetary policy front, the minutes of the May 1-2 Federal Open Market Committee (FOMC) meeting will be of interest. Since there was no post-meeting press conference, the minutes could provide some insight as to how members view the health of the economy, inflation, and the potential impact of a trade dispute.