Happy Memorial Day. While we enjoy a beautiful long weekend with friends and family, we know we are able to do so because of those who made the ultimate sacrifice for our nation. Today, we remember them.
HIGHLIGHTS:
- The S&P 500 moved higher despite political shocks. Bond yields fell on the same worries.
- Home sales data disappointed, but capital goods orders advanced.
- FOMC minutes suggest a continued “gradual” pace of rate increases.
- Coming Week: A holiday-shortened week will likely be packed with important developments including the May employment report.
The S&P 500 moved higher despite political shocks. Bond yields fell on the same worries.
The S&P 500 rose 0.33% in the latest week, despite concerns over renewed tensions with China and an abrupt cancellation of the June North Korea summit. Early in the week, Treasury Secretary Mnuchin announced the possible trade war with China was “on hold” pending fresh negotiations, which boosted stock prices. Late in the week, however, President Trump said he is considering tariffs on car imports, which put downward pressure on stock prices. Regarding the Summit, weekend reports revealed North and South Korea are in discussions to resurrect the meeting. Via Nova believes that while progress in building a peaceful Korean peninsula is of great value to world stability, trade frictions with China are a greater threat to economic activity and corporate profits.
Within the S&P 500, utilities were the outperformer for the week, helped by a decline in bond yields. Utility stocks are often referred to as “bond proxies,” because their slow and steady growth combined with relatively high dividends make them a form of bond substitute. Utility stocks often rise as bond yields fall and vice versa. However, energy stocks dropped -4.54% on news that Russia and Saudi Arabia may be near an accord to increase oil production. Oil prices fell -4.65%. Higher output usually means lower oil prices and profits for energy companies. In other markets, mid-cap and small cap stocks edged a bit higher, but internationals and emerging market equities fell. Gold prices rose amid the political turbulence as did the value of the dollar, which is up 2.51% so far this year.
The renewed concerns related to trade and peace negotiations prompted an increased investor demand for relatively safer Treasury bonds, pushing down the yield on the 10-year Treasury note to 2.98% from 3.07% the previous week. When yields fall, bond prices rise and the Bloomberg Barclays Aggregate Bond Index gained 0.78%, for the week, though it remains in negative territory year to date.
Home sales data disappointed, but capital goods orders advanced.
Home sales slowed in the latest reports, but housing overall remains on an upward trend. Low inventory levels are one reason for the sluggish pace, though rising mortgage rates will likely be a headwind for first-time buyers in the months ahead. The median price of an existing home rose 5.3% from a year earlier, which is good for home owners, but an increasing challenge for home buyers.
New orders for durable goods, a proxy for capital spending, fell in April, but that was due to a -29% plunge in the volatile aircraft category. Orders excluding aircraft rose a higher than expected 1.0%, and momentum (growth over the past three months compared with the past twelve months) accelerated pointing to continued economic momentum.
As we have said previously, the economic environment is favorable, and profits are increasing. This offers an important positive support for stock prices. Policy changes related to trade and interest rates are the most significant unknowns at present without immediately raising rates.
FOMC minutes suggest a continued “gradual” pace of rate increases.
While the Federal Open Market Committee (FOMC) kept interest rates steady at their May 1-2 meeting, the minutes offered some insight into the thinking and priorities of the members related to possible next moves. “Symmetrical” is the word used to describe how the FOMC views inflation relative to their 2% target. Just as inflation has been running below the target in recent years, the minutes suggest that the FOMC might let inflation run a bit above its target for a time.
We believe the FOMC will retain its gradual approach to raising interest rates over the near term, even if inflation begins running above 2%. But while the Fed might remain patient for a time, investors may be concerned if higher inflation erodes the earnings of fixed income bonds. This could mean higher long-term yields as we go into the second half of the year and continued downward pressure on bond returns.
Coming Week: A holiday-shortened week will likely be packed with important developments including the May employment report.
Memorial Day marks the unofficial start of summer and the summer “doldrums,” so named because trading activity tends to slow. However, this holiday-shortened week could see fresh announcements on trade policy, Iran and North Korea, which could move stock prices in either direction.
The economic calendar will also be a potential market mover with Friday’s employment report. The consensus expects that jobs increased by 190,000 in May and that the unemployment rate will stay at a cyclically low 3.9%. The jobs report is perhaps the single most important economic release in the month, and it will be the last one before the FOMC meets to potentially raise interest rates on June 12-13.