Stock Market Analysis
It was a disappointing holiday week for stock investors. The large cap S&P 500 fell 1.2% and the small cap Russell 2000 declined 1.4%. Hardest hit were Basic Material and Finance stocks which were both down 2.5% or more on the week. Only Non-Cyclical and Utilities were able to escape the week’s downward trajectory.
Since our mid-March white paper, “A Cautionary Tale”, came out, market volatility has become the watch word. The Russell 2000, for example, is negative year-to-date. The S&P 500 is trading below its 50-day moving average for the first time since the election. The cheery days of the “Hope” rally seem far away.
Indeed, much of the short-term movements in the stock market will be predicated on the chances of realizing hope. Stories suggesting pro-business policies will be delayed will likely be viewed negatively by investors. However, realistic stories suggesting policies are ready to be enacted could create a burst of excitement.
What then, should an investor make of the apparent flip-flops by the White House on subjects ranging from the Import-Export Bank, China’s currency policies and the relevance of NATO? First, remember President Trump is, above almost all else, a deal maker. He is likely to change positions as it suits him in order to get a deal done. What those deals might be and whether they are good for the U.S. may be up for debate, but expect more position changes to come as it helps get deals done.
Still, even with changing positions, President Trump faces upward battles. Congress is still on vacation and when they get back they will likely have only about a week to make an agreement to keep the government fully-operational. Another battle is healthcare. President Trump took to the media and announced a healthcare deal must be done BEFORE tax reform. Keeping his own party unified on the subject will prove challenging.
With all of this and the rising tensions over North Korea it would be easy to get highly cautious. Perhaps that time will come, but it is always good to remember the market usually travels in unexpected directions. Investor’s Intelligence, which measures the market opinions of institutional investors, has recently seen a positive rebound in its relative bullishness, usually a good sign for higher markets. Another is the put/call ratio. The last few days it has been at levels where stocks typically perform nicely over the next 30 days. Recall, market tops are usually long-lived affairs.
Presently our leading stock indicators are neutral to slightly favorable. The watchword in this environment is volatility with both upswings and downswings likely ahead. We would recommend focusing on high quality bargain securities while maintaining a moderate position in equities.
David W. James, CFA
Bond Market Analysis
It was a good week for the U.S. bond market as all sectors had positive total returns except for High Yield bonds. The U.S. Treasury bond yield curve flattened as yields on longer term maturities generally fell more than shorter term maturities.
The U.S. Dollar decreased in value slightly against other major currencies last week. Precious metals prices advanced with silver up over 1.5 percent and gold up almost 3 percent. Crude oil prices increased while natural gas prices decreased.
The inflation assumption imbedded in 10-Year U.S. TIPS (Treasury Inflation Protected Securities) is 1.93 percent. The most recent Consumer Price Inflation reading was 2.4 percent over the past year which was lower than the 2.6 percent reading the previous month. Lower inflation helps bond investors as their purchasing power is increased.
U.S. Government spending reached a record $392 Billion during March. However, tax revenue was only $216 Billion. This deficit of $176 Billion during the month is equal to $550 per person. In January 2017, CNN reported 6 out of 10 Americans do not have even $500 in savings.
Retail Sales dropped for the second month in a row. The biggest declines came in the building materials, vehicles, and gasoline areas. Sales lead economic growth so this is a key area to watch going forward.
The Atlanta Fed GDP Now forecast is now only 0.5% for the first quarter. We pointed out in our 2017 Economic Outlook that GDP has been running “among the lowest in our nation’s history.” Unfortunately, the surge in consumer and business confidence has not translated into higher economic growth. Thankfully bonds tend to perform relatively better during poor economic times and can offer diversification benefits.
Presently our leading bond indicators are no better than neutral. It seems likely bonds, in the near future, will take their keys from Washington. When stories come out talking about tax cuts being delayed or not happening at all, we believe bonds will likely rally. When the news is filled with optimism for tax cuts bonds may face headwinds. It makes sense in this environment to maintain a moderate duration and generally stick to higher quality bonds.
Matt Watson, CFA, CPA
