Market Commentary - Week Ending 6/30/2018

Summary

Market Performance Summary

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

Notable Market Headlines

It was a relatively rough week for markets around the world as we wrapped up the first half of the year. The markets started the week lower on continued fears of an escalating trade war and never fully recovered. The declines were widespread with a handful of pockets that held up reasonably well given the global environment.

For the week U.S. large stocks fell by -1.3% and are holding onto a small +1.7% gain for the year. Small U.S. stocks, which have been the standout leaders in 2018, fell by -2.4%, nearly doubling the losses of large stocks. Small U.S. stocks still remain higher year-to-date by a very respectable +7.4%. Among the market sectors, technology stocks were some of the worst performers with the NASDAQ Composite losing -2.3% of it’s value but, like small U.S. stocks, remains higher for the year by an impressive +8.8%.

International markets followed U.S. markets lower with developed markets down -1.2%. One of the bigger losers was Germany falling -2.1% while Australian stocks fell just -0.4%. Emerging markets fell by -1.3% and remain some of the worst performing in 2018. China, the largest of the emerging markets, fell -2.8% this week and is now in bear market territory off -20.4% from its January highs.

China’s market is certainly not the only one sharply off highs earlier this year. As the accompanying graph shows, both China and Brazil’s markets are in bear market territory, down -20% or more, while International Developed markets, on average, are down -11%, in correction territory, with Germany, Italy, and Spain’s markets among the biggest decliners.

Source: S&P Compustat

It is notable that the downward momentum in some of the recently worst performing emerging markets did stall. Brazil, as illustrated above, has been among the very worst performers but posted a fractional gain this week in spite of all the selling in other markets.

Commodities, driven by a surge in the price of oil due to tightening supplies, were the big winners this week with a gain of +5.1% and are now higher by +10.0% year-to-date. Gold continues to disappoint investors with another loss this week of -1.4% and lower year-to-date by -4.0%.

Real estate has been a recent strong performer posting a +0.8% gain for the week. Real estate is now back into positive territory for 2018 after having been down more than -12% year-to-date through early February. As the accompanying graph shows, real estate has been a great help in a diversified portfolio since the S&P 500’s high in January with real estate outperforming the S&P by more than +10% during that time.

Source: www.YahooFinance.com

Bond prices did move higher by +0.3% for the week and are lower by -2.9% year-to-date.

Stock Highlights

Amazon (AMZN) shook up the pharmacy world with its announced acquisition of privately-owned online pharmacy PillPack for an estimated $1 billion. This news sent fears throughout investors in today’s traditional pharmacy businesses CVS Health (CVS), Walgreens Boots (WBA), and distributor McKesson Corp (MCK). Amazon had made its intentions clear about wanting to get into the pharmacy business. There is much debate whether or not the company can do so successfully with the argument being that fulfilling and delivering prescriptions is different that delivery books and groceries. Based upon investors’ initial reaction, they clearly see Amazon’s as a potential threat wiping away a total of more than $12 billion in market value from these three competitors’ stocks as illustrated in the accompanying graph.

McCormick & Co (MKC), a global spices company, reported very strong second quarter results. Sales grew by 19% while net income surged 51%. Furthermore, guidance for full-year 2018 was reaffirmed. The company’s CEO attributed the company’s success to the execution of its strategies. McCormick’s stock rallied +9.4% for the week and is up +13.9% year-to-date.

Nike Inc. (NKE), a giant in the sports footwear and apparel business, reported quarterly results that topped wall street estimates. Total revenue hit $9.8 billion, $400 million more than analysts had forecast, with earnings per share of $0.69. In addition to the reported financial results, the company announced another stock repurchase plan of $15 billion. Investors were impressed with the stock gaining +8.5% for the week and is up +27.4% for the year continuing a strong run that began in October of last year.

Vertex Pharmaceuticals (VRTX), a biotech company, benefitted from a competitors announcement of disappointing clinical results for its cystic fibrosis drug. This announcement will likely leave Vertex with a near monopoly in treatments for cystic fibrosis. The stock was up +6.8% this week.

Economic Indicator - Reported

New Home Sales for the most recent month came in sharply higher than economists had forecast at an annualized rate of 689,000. This was up from the prior month’s 649,000 helped by an average price decline of -1.7%. This report can be volatile but the trends have been strong for the past few years although the declining prices could be an indication the upward trend in sales may slow.

The weakening trend in housing prices was further confirmed by the S&P Corelogic Case-Shiller Housing Price Index. This report did show a rise in prices in the most recent month by +0.2% but this was less than half the gain economists had forecast. Prices were weak in New York City, Washington D.C., Atlanta, and Chicago. Furthermore, prices in San Francisco experienced a rare monthly decline.

Both Consumer Confidence and Consumer Sentiment, two separate reports, came in below economists’ consensus forecast but do remain relatively strong. The Consumer Sentiment report suggested consumers feel good about current conditions but are showing more concerns about their outlook given the new trade tariffs.

Two reports suggest the economy is not a strong as originally expected. First quarter Gross Domestic Product (GDP) was revised lower to +2.0% from a previously reported +2.2%. Business spending remained strong while consumer spending sputtered. Durable Goods Orders, excluding the volatile transportation sector, declined by -0.3% as compared to economists’ estimate for an increase of +0.5%. In spite of the monthly decline it is believe the manufacturing sector remains strong.

Economic Indicators – Upcoming

The June employment report is expected to show the economy adding 190,000 which would be inline with the average for the year. The unemployment rate, having fallen -0.1% last month to a very low 3.8%, is expected to be unchanged in June. This report will be watched closely for any signs of wage pressures as the number of available workers remains very tight.

Other reports will include vehicle sales, PMI Manufacturing Index, and construction spending.

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