Market Commentary - Week Ending 6/16/2018

Summary

Market Performance Summary

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

Notable Market Headlines

The Federal Reserve raised interest rates by 0.25% to a target of 1.75% - 2.00%. This was widely expected and continues a string of rate increases that started in December 2015 and is expected to continue for the foreseeable future. These higher rates are in response to what the Fed says is a very strong economy and a return of interest rates to normal levels after having been very low since the 2008 financial crisis.The European Central Bank, or ECB, on the other hand left interest rates unchanged as European economies appear to be weakening.

At the close of the week U.S. stocks were mixed with large U.S. stocks down -0.4% while small U.S. stocks continue to show strength risking another +0.8%. Utility stocks, some of the biggest losers year-to-date, were the best performing sector this week gaining +2.4%. This move higher is contrary to conventional wisdom that would suggest higher interest rates would make these stocks less valuable. Energy stocks fell sharply, down -3.2%, on a drop in oil prices. For the year large stocks are up +3.8% and small stocks have gained +10.1%.

The real strength in the U.S. continues to be technology stocks. The sector was up +0.6% for the week and is higher by +14.3% in 2018. The NASDAQ Composite did even better for the week gaining +1.3% resulting in a new record high for the index.

International developed markets were lower by -0.6% for the week pushing them into negative territory for the year by -0.4%. These markets are now off -7.0% from their January highs with investors concerned about slowing economic growth. One notable developed market moving higher was Italy gaining +2.6% in spite of ongoing political risks.

The real action in the markets this week were in the international emerging markets. Unfortunately, this was action involved some continued sizable moves lower. Overall emerging markets declined -2.4% for the week and are off -4.0% for the year. Rising interest rates in the U.S. and a strengthening dollar puts pressure on emerging markets.

The largest of the emerging markets, China, was down -2.9% but is still higher in 2018 by +1.4%. Investors are pointing to an escalating trade battle between the U.S. and China as the problem as well as a deceleration in China’s economic growth. South Korea’s market was another big loser for the week falling -4.5%. In spite of this fall some investors are holding out hope that potential changes in North Korea could be very good for South Korea.

Brazil’s stock market fell another -3.2% this week and is now down -31% from its January high. As the accompanying graph shows it has been a sharp and rapid recent decline that puts the index well below where it was more than 5 years ago. This country is plagued by a much weakened currency, uncertainty surrounding a scheduled October presidential election, and economic troubles.

Source: www.yahoo.com/finance

Oil prices dropped sharply on concerns about tariffs that could disrupt international trade and oil consumption as well an upcoming meeting where it is expected that OPEC and its allies will raise production. The drop in oil prices pushed the commodity index lower for the week by -2.8% but it is still higher year-to-date by +4.6%. Gold prices fell to the lowest levels of the year down -1.4% for the week and off -1.9% in 2018. This is suggesting investors are showing no signs of panic and furthermore are not concerned about inflation. Real estate stocks fell -1.8% for the week giving back some of their recent recovery.

Bonds had little reaction to the Federal Reserve’s decision to raise interest rates gaining +0.1%.

Stock Highlights

The big winners were media stocks following a judge’s ruling that AT&T (T) could proceed with its acquisition of Time Warner. This arguably puts a variety of media companies in play as they all try to better position themselves to compete with the likes of Facebook (FB), Google (GOOGL), and Netflix (NFLX). Some of the week’s winners include Discovery (DISCA) gaining +18.0%, Twenty-First Century Fox (FOXA) up +11.7% with Comcast (CMCSA) and Disney (DIS) in a bidding war for the company, and CBS (CBS) up +9.7%.

Royal Caribbean Cruises (RCL), a leading cruise line, announced that it has acquired a two-thirds stake in luxury cruise line Silversea Cruises for $1 billion indicating strong demand in the industry. This stock rallied +10.7% for the week but still remains lower by -4.0% in 2018.

Netflix (NFLX), the leader in streaming media, continues to see its stock surge higher. A Goldman Sachs analyst raised his price target on the stock saying that the company’s expanding content and distribution system will drive continued subscriber growth. There is a competing argument that the merger of AT&% and Time Warner, and possible other mergers of various media companies, could result in long-term meaningful competition. For now the stock continues to climb up +8.7% for the week and an incredible +104% in 2018!!!

H&R Block(HRB), the industry leading preparer of tax returns, announced plans to close 400 of its nearly 10,000 locations as more people are using software to prepare their own returns. The company also announced some pricing changes that they expect to result in next year’s revenue to decline by -3.5%. As the accompanying graph shows, the company has struggled to grow revenue for a decade with revenue off more than -35% from its peak in 2005. The stock fell -18.8% for the week.

Economic Indicator - Reported

The headline number for the Consumer Price Index (CPI) came in exactly as economists had forecast rising +0.2% in May. Excluding the more volatile food and energy, known as the core rate, also rose +0.2% for the month. Gasoline prices jumped by +1.7%, among the biggest gainers, while airfares dropped by -1.9%. Year-over-year the core rate is higher by a moderate +2.2% with the trend generally pointing higher.

While the CPI rose a modest amount in May, a read of retail inflation, the Producer Price Index (PPI), a measure of wholesale inflation, jumped a more than expected +0.5%. Excluding food and energy, again the core rate, prices only rose +0.3% for the month and are higher by +2.4% year-over-year. Metals prices, such as steel and aluminum, experienced some of the sharpest price gains for the month of +4.3% and +5.0% respectively. Investors, nor the Federal Reserve, seemed to be spooked the larger than expected price moves.

Retail sales surged in May increasing +0.8%, double economists' forecast, on top of a slight upward revision to the prior month's number. The gains were wide spread including increases in department stores and clothing stores sales both of which have been struggling. One surprise was a gain of only +0.1% in online sales.

Consumer Sentiment, a measure of financial conditions and attitudes of households throughout the United States by the University of Michigan, increased to a reading of 99.3. This report topped economists expectations and came as a bit of a surprise with some expectations that tariffs and talk of trade wars could negatively impact this report. This month's reading is the highest since February and is right up against multi-year highs.

Economic Indicators – Upcoming

It's going to be a relatively quiet week of economic report with Housing Starts and Existing Home Sales expected for the housing industry and a report on Leading Indicators.

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