Market Commentary - Week Ending 3/24/2018

Summary

Market Performance Summary

Source: S&P Compustat, www.yahoo.com/finance for Commodities

Notable Market Headlines

There was a lot for investors to digest this week and virtually none of it led to a positive outcome in the market:

The overall result of all of this news was relatively rough for stocks both in the U.S. and around the world. In the U.S. the week opened with the Dow Industrials falling more than 300 points. Things quieted down for a couple of days and then closed the week with a more than 700 point loss on Thursday followed by Friday’s more than 400 point loss. At the end of the week, large U.S. stocks were down -5.9% and small U.S. stocks lost -4.9%.

At today’s levels, both large and small U.S. stocks are in negative territory for 2018 with large stocks down -3.3% and small stocks down -1.6%. Not only are stocks negative year-to-date but they are also touching on the lows hit in earlier February after the late January – early February selloff. The Dow Industrials are below the February 8th lows while the S&P 500 and NASDAQ remain slightly above those levels.

International stocks did hold up better than U.S. stocks with developed country stocks down -3.6% leaving them down -3.4% year-to-date. The declines were widespread among the developed countries with losses pretty similar across the board with the United Kingdom being one of the better performers losing just -2.7%. International emerging markets were lower for the week by -4.7%. This group remains the best performing among stocks around the world but did dip into negative territory for the year by -0.5%. The year-to-date performance has been very different amongst the individual countries as the accompanying graph shows.

Diversification in a portfolio beyond just stocks clearly helped this week and so far year-to-date. Commodities gained +2.3% for the week and are higher by +2.3% for 2018. Gold has done a little better gaining +2.4% for the week and +3.2% year-to-date. This demonstrates some of the benefit of having investments in a portfolio that do not tend to move up and down in the same way and at the same time as stocks often do. Real estate remains the disappointment. For the week it was down similar to stocks with a loss of -4.4% and has suffered an -11.7% loss for the year. Higher interest rates are clearly taking their toll so far in 2018.

The overall bond market was generally flat for the week leaving bonds down -2.5% year-to-date. The Federal Reserve’s hike in interest rates would be expected to put downward pressure on bond prices but this may have been offset this week as investors moved money out of stocks and into safer, loss volatile investments such as bonds.

Stock Highlights

Facebook (FB), the leading social media company and advertising giant, is getting pressure from investors and the government following news that a political consulting firm had access to and used its users’ data in ways that were surprising to most of the world. The fear appears to be the risk that Facebook will have to change its business model in some way and that this so called data breach would lead to government regulation. Investors sold the stock pushing it lower by -13.9% for the week, a loss of -$61.5 billion in market value. Year-to-date the stock is down -9.7%.

Oracle (ORCL), a leading tech company in the database business, reported quarterly results that disappointed investors. The company’s revenue grew by and earnings, after one-time adjustments, topped forecasts. Disappointing though was its cloud business not growing as fast as had been expected and the outlook for the coming quarters below what had originally been forecast. The result was the stock losing -14.3% for the week and lower for the year by -5.3%.

Micron Technology (MU), a computer chip maker, had a very strong week last week and a rough one this week. The company reported strong quarterly results with revenue up +58% and earnings above expectations. The disappointment may have been that the company expects to invest more in facilities than had been expected. The stock dropped -10.5% for the week following a rally the prior week of nearly and equal amount.

Dropbox (DBX), the popular file sharing and storage company, had its initial public offering trading on the stock exchange for the first time on Friday, at a price well above expectations. The stock was priced to open at $21 but surged at the opening and held its ground as the rest of the stock market declined to close above $28. This was clearly taken as a good sign for the technology sector showing the strong demand for such stock by investors.

The stock market leaders this week were clearly energy stocks with 8 of the top 10 performers in the S&P 500 in this sector. Many of these stocks lagged behind in 2017 but have done relatively well so far in 2018. This is not unusual for these stocks as they tend to move up and down more with the price of commodities, such as oil, as opposed to following the general ups and downs of the overall stocks market. The 5 top performing energy stocks for the week are shown in the accompanying table.

Economic Indicator - Reported

Durable Goods Orders, new orders placed with domestic factories, came in much stronger than economists had forecast gaining +3.1% in February. When excluding the volatile transportation sector, orders still were twice economists’ forecast coming it at +1.2%. There was strength in many sectors including metals orders surging +2.7% possibly being impacted by the new tariffs. For the year, orders have climbed a very strong +8.9%.

Existing home sales came in much higher than expected increasing +3.0% for the month. This gain was fueled by single family home sales up +4.2% while condo sales remain weak down -6.5% for the month and down -4.9% year-over-year. Helping single family home sales was a +4.6% increase in inventory but inventories remain very tight especially with the stronger than expected sales. New home sales for February were higher by just +0.5% at 618,000. Supplies of new homes as increased by +2.0%.

Economic Indicators – Upcoming

The Housing Price Index, produced by S&P Corelogic, will be reported with expectations that prices rose by +6.2% for January. Prices on the west coast are seeing some of the biggest gains. The month’s price gain is in line with the average during the last 12 months as the supply of new homes remains historically tight.

Consumer Confidence is expected to remain near record high levels. The tax cuts, along with income expectations being strong, are outweighing concerns about stock market volatility. The University of Michigan’s Consumer Sentiment report for March is also expected to come in at or near record levels.

The final report for fourth quarter Gross Domestic Product (GDP) is expected to show a revision higher from 2.5% to 2.7%. The consumer was the driver of strength in the quarter.

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