Market Commentary - Week Ending 4/21/2018

Summary

Market Performance Summary

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

Notable Market Headlines

First quarter earnings reports continue to come in ahead of expectations showing robust growth on both the top and bottom lines. At the close of the week large U.S. stocks were higher by +0.6% and are now essentially where they started the year and about -10% off their January highs. Small U.S. stocks had a better week gaining +1.0% and are higher year-to-date by +2.0%.

International markets were mixed for the week with developed country stocks gaining +0.4%. A couple of markets that outperformed the average were those in both France and Italy up +1.2% and +1.6% respectively. The Italian market is higher for 2018 by an impressive +11.7% as compared to the average developed market up only +1.1%. Emerging markets were lower for the week by -0.7% as China’s market, the largest of the emerging markets, fell -2.5%. Year-to-date emerging markets are now higher by just +0.3%.

The price of oil continued to rise which drove the commodities index higher by +1.2%. Commodities are by far the best performing major asset class in 2018 with a gain of +6.8%. On the opposite end of the spectrum is real estate losing another -1.0% this week and down -9.8% for the year making it the worst performing asset class in 2018.

There was some indication that inflation pressures may be mounting as economic growth remains robust. The reaction to this in the market was mixed as bond prices fell, down a meaningful -0.8%, pushing yields higher suggesting the expectation of higher inflation. On the other side, gold prices, also viewed as a barometer for inflation, fell this week by -0.6%. Year-to-date both bonds and gold are pointing to the possibility of higher inflation with bond prices down -3.1% and gold prices up +2.4%.

Stock Highlights

Textron Inc. (TXT), a diversified manufacturer, reported earnings very strong earnings of $0.72 per share, nearly double last year and 50% better than estimates. This strong report was partially due to low tax rates but more importantly strong demand and sales growth that the company expects to continue. The stock jumped +12.1% for the week and is higher year-to-date by +15.9%.

Xerox (XRX), the once dominant copy machine business, is reportedly in talks to renegotiate a deal it struck with Fujifilm Holdings earlier this year. This buoyed the stock with it gaining +12.0% for the week. This company is an incredible story of rise and fall as illustrated by its annual sales in the accompanying graph. Its stock price has seen even more ups and downs as documented in our blog earlier this year.

Source: S&P Compustat

Philip Morris International (PM), with nearly $29 billion in annual sales of cigarettes and related products, reported quarterly results that disappointed Wall Street. Sales were actually higher by +13.7% but did miss expectations due to lower shipment volumes. The company is feeling pressure from many directions including the increased use of both vaping and marijuana. The stock fell -17.3% for the week, wiping our $27 billion in value. The stock is off its high set about a year ago by -31%. At this lower price, the stock has one of the highest dividend yields in the market at 4.3% annually.

The S&P 500, the most widely used measure of the stock market’s performance, is bouncing around the breakeven point year-to-date. Interesting though is that the number of stocks individually in bear market territory, down -20% or more from their highs, has nearly doubled since the start of the year. Of the 500 stocks in the S&P 500, 100 are technically in a bear market as compared to just 51 at the start of the year. Some of the big names on this list today are General Electric (GE), Dish Network (DISH), and Mattel (MAT), all of which are down -40% or more.

Source: : S&P Compustat

Economic Indicator - Reported

The report on retail sales for March was mixed with the headline number coming in better than expected at +0.6% while the core number, excluding autos and gas, was below expectations at +0.3%. Auto sales finally showed strength gaining +2.0% for the month following a period of slower sales after the hurricane replacement bump last year. Department stores and clothing stores had declining sales for the month while online sales continued to climb.

Industrial Production, a measure of manufacturing, mining, and utilities, grew by +0.5% in March which was slightly better than expected but less than half the growth rate in the prior month. Mining and utilities were strongest while the manufacturing sector lagged behind.

March Housing Starts were stronger than expected, topping even the highest economists’ estimates, at 1.319 million annually. This strong report did have a mix of numbers with multi-family starts up +14.4% while single family starts fell -3.7%. Strong housing starts are welcomed as supplies are low and holding down sales.

Economic Indicators – Upcoming

We will get our first look at first quarter Gross Domestic Product (GDP) with economists forecasting growth of +2.0%. This would be a meaningful slowdown from the fourth quarter’s strong +2.9%. Consumer spending, a major component of GDP, is expected to slow to +1.2% for the quarter as compared to +4.0% in the prior quarter.

The S&P Corelogic Case-Shiller Housing Price Index, a measure of housing prices in 20 cities, is expected to show prices higher by +0.7% in the most recent month which is just slightly below the prior month’s gains. The rate at which prices have been going higher has been strong for more than 3 years.

New home sales and existing home sales will be reported for March. New homes sales are expected to show a slight improvement over the prior month but still below the highs late last year as mortgage rates move higher. Economists’ forecast for existing home sales is for slowing in March following a robust February.

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