Market Commentary - Week Ending 5/19/2018

Summary

Market Performance Summary

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

Notable Market Headlines

Reports that the economy is strong and possibly gaining momentum sent bond prices lower and yields higher. This created a chain reaction pushing the prices of many investments that are sensitive to interest rates, such as real estate and utility stock, lower as well. The Dow Industrials had been on a short winning streak gaining 8 days in a row higher that added nearly 1,000 points to the index. That winning streak came to an end on Tuesday and stocks were little changed for the remainder of the week.

U.S. large stocks, as measured by the S&P 500, lost -0.6% for the week. Energy stocks were the best performing, up +2.0% while utilities were the worst followed by technology stocks. Small U.S. stocks bucked the selling pressure and gained an impressive +1.3%. Year-to-date small stocks are meaningfully outpacing large stocks with a gain of +6.2% and +1.7% respectively. This year’s outperformance of small stocks is the exact opposite of what was occurring last year at this same time when large stocks were meaningfully outpacing small as illustrated in the accompanying graph.

Source: S&P Compustat

International stocks faced selling pressure this week as well. International developed markets were lower by -0.6% for the week leaving them higher year-to-date by just +1.5%. Italy’s market was one of the harder hit, down -4.7% for the week, as political concerns rattle investors. Emerging markets had a much worse week falling -2.8% leaving the index in negative territory year-to-date. Brazil’s market contributed to the declines with a loss of -6.4% for the week and now off -18.7% since late February.

After staging a multi-week recovery, the momentum in real estate stocks collapsed this week falling -3.6% on higher bond yields and expectations of higher interest rates. Year-to-date real estate remains the worst performer of the major asset classes down -7.4%.

Commodities, driven by the continued rise in the price of oil, rose again up +1.0% for the week and now higher by +10.4% for the year. Oil prices have now doubled since the lows in January 2016. Gold has been going the opposite direction, suggesting little concern among investors about inflation and overall fear, falling -2.1% for the week and now lower year-to-date by -1.0%.

Bond prices fell -0.5% for the week leaving the index down -3.7% for the year. The yield on the 10-Year U.S. Treasury, considered a benchmark for the overall market, rose above 3.0% this week to its highest level since 2011. This came on news of economic strength that is believed to raise the likelihood that the Federal Reserve will raise interest rates further.

Stock Highlights

Symantec Corporation (SYMC), a leader in cybersecurity solutions, was the second best performing stock in the S&P 500 for the week. The stock gained +13.7% but is just rebounding from a -29.9% plunge last week when it provided disappointing earnings guidance and disclosed an internal probe into its finances. This week the company said that the internal audit would not result in major restatements to historical results which came a relief to investors. At today’s prices and expected earnings, the stock looks inexpensive relative to other similar stocks but the company will face a variety of challenges as it deals with its recent developments.

Macy’s (M), a major mall-based retailer, is showing signs of pulling out of a prolonged slump. The company reported strong results for the quarter with the big number being a +3.9% increase in same-store sales. The company also raised earnings guidance for the remainder of the year. This is all welcomed news given the multi-year decline in overall sales as illustrated in the accompanying graph. This week’s news was all very well received by Wall Street making the stock the best performing in the S&P 500 with a gain of +14.6% for the week. It is now higher by a very impressive +34.8% for the year but is still more than -50% below its 2015 high.

Source: S&P Compustat

Campbell Soup (CPB), the iconic soup company, reported quarterly sales of $2.125 billion, slightly below forecasts with earnings per share that came in better than estimates. In addition to soups the company has been pushing into fresh foods which has yet to be successful. With sales having fallen for multiple years, problems with acquisitions, and its stock down nearly -50% from its 2016 high, the CEO announcement his immediate retirement and the board will conduct a full review of the company’s businesses. Investors are concerned with the stock falling -15.5% for the week.

Applied Materials (AMAT), a leading manufacturer of computer chip making equipment, reported quarterly sales that were 29% above last year’s same period and net income up 37%. Both sales and earnings surpassed Wall Street estimates but guidance for the current quarter was well below Wall Street’s current expectations. This stock, a major bellwether for technology stocks and, in particular chip stocks, fell -9.7% for the week.

Economic Indicator - Reported

This month’s retail sales report triggered a variety of activity in the markets. Sales were reported higher by +0.3% in April, in-line with economists’ expectations. When removing autos and gas from the number, sales were still higher by +0.3% which was one-tenth below expectations. Regardless of the relatively mixed numbers in the report, investors took this as a sign of economic strength that could result in the Federal Reserve having to raise interest rates further to tap the breaks on the economy.

Industrial production was strong in April as well gaining +0.7%. The strength was across the board with manufacturing, mining, and utility output all strong. April’s strength follows and upward revised equal-sized gain in March. A separate report, the Empire State Manufacturing Survey, a measure of manufacturers in New York State, also showed significant strength that was meaningfully better than economists had expected. Both reports point to a strong overall economy.

Housing starts fell -3.7% in April which was all the result of a decline in the multi-family sector. Single-family starts were stable, up +0.1% for the month, while single-family permits rose +0.9% suggesting more strength in the future for starts. For the year, the trend has been very strong with housing starts up +10.5% over last year.

Economic Indicators – Upcoming

Durable goods orders, orders placed with U.S. manufacturers, will be reported with an expected decline in April of -1.3%. This negative headline number is expected due to anticipated declines in the volatile transportation sector. When stripping out transportation, durable goods orders are expected higher by +0.6% following a flat reading the month before.

Two reports will provide further information on the housing sector with both new homes sales and existing home sales expected. New home sales are expected to slow as compared to the prior month’s surge higher while existing sales are forecast to remain steady.

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