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Market Commentary - Week Ending 7/7/2018
- Stocks rally around the world, with few exceptions, as U.S. small stocks lead the way
- The two largest Asian markets, Japan and China, lost value
- The U.S. employment market remains strong with numbers coming in at the top end of estimates
Market Performance Summary
Source: S&P Compustat, www.yahoo.com/finance for Commodities
Notable Market Headlines
Stocks generally rallied around the world with U.S. markets leading the way. This is an exact reversal of performance the prior week when there were losses across the board. This week’s rally was helped by strong U.S. economic data but did come in spite of a continued escalation in trade and tariff headlines.
At the close of the week U.S. large stocks were higher by +1.5% and are again higher by +3.5% year-to-date. The NASDAQ Composite did particularly well gaining +2.4% while the Dow Industrials lagged behind with a gain of just +0.8%. The big winners this week were small U.S. stocks surging ahead by +2.7% leaving them higher by +10.4% for the year. Among the leading sectors were Utilities, higher by +2.5% for the week, as bond yields came down making the dividends that utilities pay more attractive.
International markets moved higher with the U.S. markets but the gains were not as widespread. Developed markets gained +0.9%. European markets were strong with Germany up +2.2% and Spain jumping +4.3%. On the downside was the largest of the developed markets, Japan, down -1.2%. Year-to-date developed markets remain lower by -3.9%. Emerging markets notched a small gain for the week helped by a strong relief rally in Brazil gaining +3.5% but still lower by -18.0 in 2018. The biggest of the emerging markets, Japan, continued to lose value down -1.5% for the week and -8.3% year-to-date.
Real estate stocks continued their recent rally helped by lower bond yields, similar to the utility sector, making the dividends paid by real estate stocks more valuable. These stocks gained another +1.4% and are now up +16.2% from their January lows. Commodities, after being the only winner the week before, were the only losers this week declining -1.3%. Gold posted a modest +0.2% gain but remains lower for the year.
Bond prices did move higher by +0.2% resulting in slightly lower yields. It is still widely expected that the Federal Reserve will continue to raise interest rates which is expected to continue the downward pressure on bond prices.
Biogen, Inc. (BIIB), a $75 billion market cap biotechnology company, reported positive results in its Alzheimer’s clinical trials. This good news came as a surprise to investors due to initial negative results reported in December. Biogen’s stocks surged +23.2% for the week adding $15.6 billion in market value. As the accompany graph shows though this stock, as is the case with all biotech stocks, is highly volatile. Biogen’s price today is still shy of its late 2017 high and well off its early 2015 highs.
Advanced Micro Devices (AMD), a relatively small player in the semiconductor industry, was among the best performing technology stocks in the S&P 500 gaining +9.1% for the week. Chip stocks have been recovering from a springtime selloff but the recovery has not been as strong for all stocks in the group. As the accompanying graph shows, year-to-date AMD has posted the best performance while stocks such as Intel (INTC), the industry giant, has lagged behind meaningfully.
Source: S&P Compustat
The stock of Wynn Resorts (WYNN), a leader in the gaming industry, fell sharply on disappointing new making it the worst performing stock among the S&P 500 for the week. Casino companies have been betting big on the growth in Macau, a Chinese gambling enclave. Most recent numbers show growth strong with gaming revenues up +12.5% in June but behind the estimate of +18% growth. Wynn’s stock fell on this news and was lower for the week by -6.3%.
Nike (NKE), the largest sports shoe and apparel company in the U.S., lost its sponsorship deal with tennis legend Roger Federer. Federer’s new sponsor, Uniqlo, reportedly is paying him $300 million over 10 years. Although Uniqlo is much smaller today than Nike, this is an aggressive strategy by the company to attract attention to is brand and clothing and has the potential to inch away at Nike’s market share. Nike’s stock dropped -4.0% for the week or about $4.1 billion in market value.
Economic Indicator - Reported
The June employment report came in strong with 213,000 jobs added for the month. This was above the consensus average of 190,000 and topped even the most optimistic individual forecast. On top of June being strong, numbers were revised higher for the two prior months as well. The accompany graph shows the year-over-year change in manufacturing employment, one of the stronger sectors of the economy recently, clearly picking up momentum.
Along with the strong jobs growth was only a modest rise in hourly wages of +0.2%. This was on the low end of estimates and is up just +2.7% during the past 12 months.
Vehicle sales in the United States, sales of both domestic and import models, were stronger than expected at an annual rate of 17.5 million. The increase for the month was all from domestic brands while sales of imports were flat. This bodes well of consumer spending in June.
Economic Indicators – Upcoming
The markets will have two reports on inflation this week. The Consumer Price Index (CPI), a measure of retail inflation, is expected to show an increase in prices for the month by +0.2% following last month’s +0.2% gain. The same is expected for the Producer Price Index (PPI), a measure of wholesale inflation, after a very hot +0.5% gain in May.
Consumer Sentiment, a survey of 600 households by the University of Michigan on their financial conditions and attitudes about the economy, is forecast to come in strong with a reading of 98.4. This report has been trending near all-time highs for nearly a year.