Weekly market update
The bulls put in a good showing last week to lift the major averages in one of the best weeks of the year. The Dow rose 2.5%, the S&P 500 rose 2.49% and the NASDAQ rose 2.73%—putting all of the major averages in positive territory for 2018. Despite the strong performance so far in May, the debate continues on several fronts.
First, on the global growth—is it expanding or slowing? The bulls believe that despite some recent weakness, we are still seeing solid growth around the globe. But the bears want you to believe we’ve hit a brick wall and growth is slowing significantly.
And then on the inflation front—the bears want you to believe that inflation is ramping up while the bulls believe inflation is contained. Outside of the strong wage growth we got in January, inflation reports have been showing subdued inflation.
And finally, on earnings—the bears are in the camp that earnings have now peaked and should start to slow down. After running at about 23% YoY earnings growth, the bulls say that even if they slow some, they are still seeing very healthy growth.
We are caught between the forces of ‘good vs. evil’. On the one hand, we have strong fundamentals, strong earnings, better economic data, unemployment running at post-war lows and a FED that is beginning to normalize rates. On the other hand, we now have these new geopolitical threats—on top of the existing ones. And while we realize that politics do not set equity prices and valuations in the long term, they do have the ability to destabilize the thinking in the short term.
So what’s next? Who’s going to win the debate? As I have said before, the view is always much clearer looking in the rearview mirror, so we will have to wait and see how the debate plays out.
We were thinking at the start of May that some of these issues would play themselves out and it seems that despite the ongoing debate, stocks have pushed to their highest level since mid-March.
Across the pond, stocks appeared ready to hit the pause button even though they extended their gains for the seventh straight week, despite renewed Middle East tensions, a nuclear standoff with Iran and concerns over the upcoming mid-summer Italian elections.
In taking a quick look at the economy, the biggest data point so far in May has to be the jobs report. Here is my takeaway from the April jobs report:
The good: The unemployment rate fell to 3.9% during the month, the lowest level since December 2000. Black unemployment dropped to 6.6%, its lowest level ever.
The bad: There were two points that gathered a lot of attention—first, that the total job creation of 164,000 was considerably below the 192,000 that economists surveyed had expected. Also, wage growth was just 2.6% percent on a YoY basis, below market expectations of 2.7% and throwing cold water on the hot wage inflation debate.
The ugly: America’s shrinking labor pool continues to be a problem. Another 410,000 folks dropped out of the workforce, bringing the total to 95.74 million. That’s a big reason for the dropping headline unemployment rate. But, the latest Job openings and labor turnover (JOLTS) report showed there was basically one job for every one person seeking a job.
Looking forward, the bulls will need to find the catalyst to help keep stock prices higher now that earnings season is winding down—and we also know that the economic data won’t be that catalyst—other than retail sales and the index of leading indicators, there are no data points to move the needle one way or the other. We, unfortunately, will have to pin our hopes on the positive catalyst coming from cooling geopolitical tensions, but I wouldn’t hang my hat on that one. So stay tuned and we’ll keep you posted.
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
May 14, 2018
