- On March 25, 2019
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Cornerstone’s Week on Wall Street
Stocks ended the week on a sour note last week, as equity markets sold off hard on Friday with major U.S. indexes off almost 2%. For the week, stocks were down led by small-caps, down 3.1%, followed by the Dow Jones Industrial Average, down 1.3%, and the S&P 500 down 0.8%. Cyclical sectors such as Materials and Industrials lagged the broader markets on the week, while defensive sectors such as Real Estate and Consumer Staples stocks were positive. Financial stocks were the hardest hit, down 4.8% as yields fell. Last week’s financial news was dominated by a Fed that was more dovish than expected, citing no more rate hikes this year, and by the inversion of the 3-Month/10-Year segment of the U.S. Treasury curve, the first of its kind since 2007. A yield curve inversion happens when the yields or interest rates on shorter-dated Treasuries become higher than longer-dated counterparts. This is important because, in the past, the curve inverted prior to each of the last 9 recessions spanning the last 60 years. It is again likely a recession signal, but the timing is uncertain as the time lag between inversion to the start of recession historically has been between 8 months and 2 years, with an average of roughly 16 months.1
The yield curve inversion on Friday was the latest in a string of downbeat global macroeconomic data points, yet stocks have remained broadly resilient. Global monetary policy remains supportive for stocks and other risk assets as central banks across the globe abandoned tightening, and in some cases embraced renewed easing policies. While stocks have rallied, bond yields remain depressed in the near term as concerns over growth prospects remain. It is too early to tell if the economy is experiencing a temporary soft-patch, or if the data is signaling trouble on the horizon. We continue to favor a balanced approach maintaining exposure to secular growers while also positioning portfolios for late-cycle dynamics and will remain vigilant in parsing the data to navigate whatever lies ahead.
We can close the book on the 4th quarter 2018 earnings season and look to the first reports from 1st quarter 2019 earnings. According to Factset, the S&P 500 grew sales 7.1% year-over-year and earnings-per-share by 13.3% on average.2 Consensus expectations for first quarter 2019 are for earnings-per-share to
contract by 3.5% for the quarter, but to grow by 4.1% for the full-year. Earnings estimates have come down significantly with all of the growth for the year forecasted to occur in the latter half of the year. Time will tell if these forecasts will come to fruition, but we will begin to get clues this week. Companies due to report results include: Carnival (CCL), Lennar (LEN), Accenture (ACN) and CarMax (KMX). On the economic front, investors will get the final number for fourth-quarter GDP, housing, in the form of Housing starts and Home prices, Consumer confidence, and Jobless claims.
2. Factset estimates
Economic, return data, and fund flows from Bloomberg (return data includes dividends).
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