- On March 4, 2019
- commentary, community, economics, Economy, investment, Investments, investors
Stocks continued to rally last week led by the tech-heavy NASDAQ, which was up almost 1%. Both the S&P 500 and the Dow Jones Industrial Average have now been positive in 9 of the last 10 weeks, while the NASDAQ is a perfect 10 for 10. Energy (+1.1%), Technology (+1.0%) and Financial stocks (+0.9%) led the markets higher, while Materials (-1.4%), Real Estate (-1.2%), and Consumer Staples stocks (-0.4%) lagged. Bond yields ticked higher on the week as the benchmark 10-Year U.S. Treasury yield settled at 2.74%.
Trade headlines dominated the week as representatives from the U.S. and China get closer to finalizing a trade deal. Bloomberg reported over the weekend that “The U.S. and China are close to a trade deal that could lift most or all U.S. tariffs as long as Beijing follows through on pledges ranging from better protecting intellectual-property rights to buying a significant amount of American products…”. The deal could happen as early as the end of the month, culminating with a summit between President Trump and President Xi of China as early as March 27.1
On the macroeconomic front, fourth-quarter 2018 GDP came in ahead of consensus (and our) expectations at 2.6% year-over-year growth. For the full year, the U.S. economy grew 2.9%, tying 2015 for the strongest growth rate in the last decade. According to Bloomberg, consensus expectations are for first-quarter 2019 GDP growth to be 1.9%.
We continue to monitor incoming data for clues on the strength of the equity market rally. While the S&P 500 continues its march higher, up over 19% since the December lows, we remain somewhat cautious and continue to take a balanced approach as global economic data is slowing. One data set that we follow religiously is the Purchasing Manager’s Index (PMI). A number above 50 indicates economic expansion, while a number below 50 indicates contraction. The most recent release in the U.S. came in at 54.2, below expectations, and down from the peak of 60.8 in August 2018. As you will see in the chart below, globally the data is a bit worse. As of the most recent reading, the global economy is at the brink of contracting with a reading of 50.6. Historically, PMI has been highly correlated with equity market returns. That relationship has been interrupted in the short-term as equity markets continue higher, while the data softens. So far, markets
have ignored macro data, instead choosing to focus on Trade and central bank activity, but the real question is once the elusive trade deal is finally reached will fundamentals again start to matter?
Earnings season continues its march toward completion this week. As of this writing, 485 of the 500 S&P 500 companies have reported quarterly results. Total sales for the index grew 6.2% year-over-year, and earnings grew 12.0%. Last quarter, sales and earnings were up 8.0% and 24.2% respectively. Company earnings this week include: Target (TGT), Kohl’s (KSS), Salesforce.com (CRM), Dollar Tree (DLTR), Merck (MRK), Costco (COST) and Kroger (KR). On the macroeconomic front, we will get an update on jobs and unemployment, December Trade balance, housing starts and home sales, January retail sales, and construction spending this week.
Economic, return data, and fund flows from Bloomberg (return data includes dividends).
The Purchasing Managers’ Index (PMI) is an indicator of economic health for manufacturing and service sectors. The purpose of the PMI is to provide information about current business conditions to company decision makers, analysts and purchasing managers.
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