Weekly market update
Stocks struggled for direction last week and the major averages all finished in the red. The Russell 2000 index (small caps) did, however, finish positive. They are somewhat immune to some of the issues we have on our plate right now. Despite having a down week, the major averages are having one of their best Mays in some time. Those who followed the adage of “Sell in May and go away” are not too happy right now.
There were a lot of issues for investors to digest last week: China, NAFTA, Iran, North Korea, oil and interest rates.
Trade talks between the U.S. and China seem to have stalled and a breakdown in NAFTA discussions had the markets concerned. That’s a lot to juggle and the President needs something positive to occur on one of these fronts. He needs a deal. The markets care.
Oil prices continue to rise to levels not seen since 2015 but it hasn’t been seen as trouble for stocks–yet.
I also highlight that with yields on Treasuries rising above 3% and even hitting 3.11% have investors concerned. The yield on the 10-year Treasury has now climbed above the yield on the S&P 500 and that has some concerned that investors will be looking at a 3% risk-free rate as more attractive the owning stocks with less yield and more risk–this hasn’t happened as of yet.
Over the weekend, we learned that the U.S. and China are suspending the tariffs while they try to hammer out a deal. Secretary Ross said on the China trade talks: “You can’t be tariffing people at the same exact time that you’re negotiating a detailed arrangement with them–and stocks soared!
A few notable earnings reports last week–Home Depot, Walmart and Macy’s. Home Depot reported a difficult quarter. They used the weather excuse, but for them, it is valid. A general retail rule of thumb: If you sell seeds and there’s snow on the ground until the last week of Q1 you’re allowed to mention weather, especially in the context of strength in everything else.
Walmart beat top and bottom and e-commerce sales grew 33% YoY. And Macy’s looks like it’s a turnaround story that had been left for dead.
Speaking of retail–retail sales in April was up 0.3% as expected, ex-autos were a bit light. Following March’s surprising surge in retail sales–after 3 months of declines–April saw spending growth slow notably to just +0.3% from a revised-higher March 0.8% gain.
Two regional FED reports were also released last week. The Empire State Mfg. Survey and the Philly FED survey both surpassed expectations in a big way. Prices paid, employment and new orders saw the biggest boost. This may confound the slowdown crew–at 40.6 in May, the New Orders index within the Philly FED monthly Survey of Manufacturers was the highest since March 1973 and the third highest in 50 years of survey records. The long-term average is 9.6. We also saw unequivocal strength is the message from industrial production which rose 0.7% in April on top of an upward revised 0.7% gain in March.
This week we will be watching to see how investors react to the news on tariffs–for the time being, that takes one worry off investors, but the geopolitical issues still exist so we will see what developments come to the surface this week. The economic calendar is light, but we will get two more regional FED reports from Chicago and Kansas City and we will watch to see if they have the same strength as the Empire and Philly reports from last week. We will also get consumer sentiment which continues to run at a high. Other than those reports, we will hear from a number of FED speakers this week and we will be listening to their comments on the state of the economy and how many rate increases we should expect for the remainder of 2018.
There will not be a weekly market update next week, but join me in two weeks for the review of May and what we will be watching for in June. Have a safe Memorial Day weekend!
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
May 21, 2018
