For a PDF version of the below commentary please click here Weekly Letter 4-23-2018

Commentary quick take:

 

  • Major developments:
    • Relatively small up week for the markets
    • Focus shifted from politics to earnings
    • Philip Morris had a very bad day

 

  • US:
    • 1st Quarter Earnings Season
      • 17 percent complete
      • 80 percent of companies beating revenue estimates
      • Blended earnings growth stands at 18.3 percent
    • GE may be headed out of the Dow
    • Politics held nothing new

 

  • Global:
    • President Trump and Prime Minister Abe golfing
    • China economy looks solid
    • OPEC draws fire from President Trump

 

  • Hybrid investments strategy update:
    • Several changes
    • Three new ETFs purchased
    • Shifting positioning for earnings season

 

  • This week for the markets:
    • Busiest week for first quarter earnings
    • Technology earnings will drive overall market movements

 

  • Interesting Fact: Just how big is GE?

 

Major theme of the markets last week: First quarter 2018 earnings

Last week, the US financial markets finally had something more to focus on than Comey’s book release and the ongoing Mueller investigation as first quarter earnings provided a nice respite to the events that have recently been unfolding in Washington DC. The cartoon above shows what has been happening so far with earnings as corporate America looks poised for a strong first quarter of 2018. So far, earnings have come in better than expected, with 80 percent of the releases having beaten earnings expectations and 72 percent having beaten revenues estimates. However, the positive results from the first quarter of 2018 have not been without some concerns addressed on analyst calls, with the primary concern being trade wars and what that could mean to consumer prices here in the US. Another area of concern that has been brought up in many of the calls outside of the financial sector is the rising interest rates that we have been seeing so far in 2018 as the 10-year US treasury creeps up toward 3 percent, while the overall fixed income yield curve has been flattening. Capital intensive businesses become more difficult to run as interest rates are increasing, something that many corporations have not had to deal with in a meaningful way for many years.


US news impacting the financial markets:

 

The US news last week primarily focused on earnings season. There were a few ancillary headlines about politics, but they were largely about former FBI director James Comey and the ongoing investigation of Robert Mueller, two topics that the markets seem to have almost fully lost interest in at this point.

 

Last week, the second quarter 2018 earnings season saw a significant increase in the number of companies that reported results when compared to the first week. Below is a table of the well-known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Alcoa 28% Honeywell 3% Progressive 3%
Abbott Laboratories 2% IBM 2% Philip Morris 14%
American Express 9% JB Hunt -2% Charles Schwab 2%
Bank of America 5% Johnson & Johnson 2% Schlumberger 0%
Baker Hughes 50% Kinder Morgan 5% Stanley Black & Decker 3%
Bank of New York 13% Manpower 4% Taiwan Semiconductor -2%
Blackstone Group 41% Mattel pushed Textron 57%
CSX 18% Morgan Stanley 13% United Continental 2%
Danaher 6% Netflix 2% UnitedHealth 4%
General Electric 45% Nucor 6% United Rentals 21%
Genuine Parts -4% Novartis 2% US Bancorp 1%
Goldman Sachs 23% Procter & Gamble 2% Waste Management 11%

 

The high-flying sector last week was the industrial sector as companies like General Electric, CSX, Alcoa, Honeywell and Textron all turned in stellar results. Despite the nice beat by GE, there are still several prominent investors wondering out loud if GE would be worth more broken up into different business lines than it is worth combined. If such a breakup were to happen, the Dow would lose its longest running member company and the final company that has been a member of the Dow 30 since its formation in 1896. Large financials were another focus of earnings last week as Bank of America, Bank of New York, Goldman Sachs, Morgan Stanley and Charles Schwab all beat earnings expectations as trading revenues at each of the firms increased during the quarter as volatility in the markets made many investors adjust their positions and how they are investing. Large financials also had the benefit of rising interest rates throughout much of the first quarter, allowing them to increase the rates they charge on loan products, while still not forcing them to increase the amount they are paying to deposit holders. Philip Morris last week beat earnings by 14 percent, but saw a decline in total volume and, in the analyst call, cited many potential problems forthcoming for the company. The stock reaction was negative as the company saw its worst trading day ever, declining by more than 15 percent.

 

According to Factset, we have seen 87 (17 percent) of the S&P 500 companies release results for the first quarter of 2018. Of the 87 companies that have released earnings, 80 percent have beaten earnings estimates, while 7 percent have met expectations and 13 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 72 percent of the companies have beaten estimates, while 28 percent have fallen short. The overall blended earnings growth rate for the S&P 500 now stands at 18.3 percent, the highest reading since first quarter of 2011. Healthcare, Energy and Real Estate have been the primary drivers of the out performance of earnings so far this quarter, but this leadership could change in the future as several sectors have yet to report any results. Energy has several tail winds that it is currently enjoying as the price of oil was more than 20 percent higher during the first quarter of 2018 when compared to where it was during the first quarter of 2017. A second major tailwind for energy has to do with the number of rigs operating in the US during the quarter as the number has increased significantly as the price of oil has remained elevated.

 

This week is the third official week of earnings reporting for the first quarter of 2018 and it is the busiest week of the season for the S&P 500 with 41 percent of the index reporting results. The table below shows the companies that will be releasing their earnings this week with those that have the greatest potential to move the markets highlighted in green:

 

American Airlines Alphabet PayPal
Arthur J Gallagher Glaxo SmithKline Reliance Steel
Alaska Air Halliburton Raytheon
Amgen Helen of Troy Starbucks
Amazon.com Honda Motor Sherwin-Williams
Anthem Harley-Davidson Six Flags Entertainment
Astrazeneca Hershey Sanofi-Aventis
Boeing Intel Simon Property
Biogen Idec Iron Mountain Stryker
Bristol-Myers Squibb JetBlue Airways AT&T
Caterpillar Kimberly-Clark T-MOBILE
CIT Coca-Cola Travelers
Colgate-Palmolive Eli Lilly & Company Twitter
Comcast Lockheed Martin Time Warner
CME Southwest Airlines Texas Instruments
Canadian National Railway Mattel Union Pacific
Capital One Financial Moody’s UPS
Chevron Meredith United Technologies
DR Horton MGM Resorts Visa
Dunkin Brands 3M Company Verizon
Dr Pepper Snapple Altria Western Digital
eBay Microsoft Whirlpool
Ford Motor Northrop Grumman Weyerhaeuser
Facebook Norfolk Southern Wynn Resorts
Fortune Brands PepsiCo US Steel
Freeport-McMoRan PulteGroup Xcel Energy
General Dynamics Public Storage Exxon Mobil
General Motors Phillips 66 Xerox

 

As you can see in the above table, the list of companies that are reporting earnings this week is very extensive as many industry leaders report their results. The markets will be closely watching a few of the above companies and giving their results more weight than the others. Alphabet (Google), Facebook, Amazon, Twitter and Microsoft will take most of the spotlight this week as these companies have been a meaningful part of the driving force behind much of the gains in the overall markets. Amazon (which just last week released that they have over 100 million prime subscribers) will perhaps be the most impactful on the markets as the company has expanded into so many different business lines, including Whole Foods and grocery delivery. Facebook will be closely followed to see if there is any change in earnings due to the security breach that forced Mark Zuckerberg to testify before Congress, during which he said that he had not seen any meaningful change in advertiser’s dollars coming to the company following the misuse of personal data from third party companies. The defense sector, including Raytheon, Northrop Grumman, Lockheed Martin and Boeing, will be followed closely this week as well as the sector has been flying high following many of the recent actions and announcements from the White House. Lastly, US Steel will be watched closer than normal this quarter as the street waits for any impact the company is seeing from the tariffs imposed on imported steel. So far, it seems US manufactures have been able to increase their prices and not see demand for their products be adversely impacted, but the full extent of the tariffs have not yet been felt as many companies that purchase steel products are working through their large stockpiles of inventory.

 

Global news impacting the markets:

 

The global financial news last week focused on Japan, a potential trade war and global oil prices. Last week, Japanese Prime Minister Shinzo Abe came to the US and met for several days with President Trump in Florida, where they enjoyed some relaxation playing golf as well as serious times discussing various topics. One topic the financial markets were particularly interested in was trade between the US and Japan. There still appeared to be some disagreement between both sides. PM Abe said multiple times that the US trying to rejoin the Trans Pacific Partnership (TPP) was the best framework for the US and Japan trade arrangement. President Trump hit back, saying he prefers bilateral negotiations. President Trump also stressed several times that he wanted to narrow the “$600 billion trade deficit” the US runs with Japan. There are plenty of issues with this idea, however, since the US almost must import significantly more goods than Japan needs to import from the US. On a more congruent note, both leaders agreed on keeping maximum pressure on North Korea about the country’s nuclear program while talks are underway between the North Korea and other world powers.

 

China made several headlines last week about trade as Chinese officials, along with several White House officials, want to peacefully come to an agreement on trade between the two countries. President Trump appears to be the wildcard in the negotiations as China, like most of us, has no idea what will be coming next on the topic of trade. China last week released some positive economic figures as manufacturing in China picked up for the first time in three months and its first quarter GDP figure was exactly in line with expectations, keeping China on an annualized GDP growth trajectory of 6.8 percent on a year-over-year basis. During the quarter, exports in China made up for the government’s continued crack down on speculative real estate activity, but this strength in exports could fade quickly if a full-blown trade war erupts. The central bank in China also announced last week that it would decrease the reserve requirement ratio by 1 percent for the various tiers of the banking institutions. The goal of the change is to help the smaller financial institutions lower the costs of loans to small and very small businesses as the country continues to try to move away from being an export driven economy and more toward an internal consumption economy.

 

Global oil prices were the other focus of the financial media last week. Even President Trump jumped into the fray, taking aim at OPEC on Twitter following an OPEC meeting. It should come as no surprise that when oil prices around the world are high, OPEC makes more money. When they are low, OPEC wants them to be higher. However, OPEC has had a tough time controlling the amount of oil in the global supply chain because Russia and the US, to name just two countries, do not abide by OPECs edicts on supply. Oil seems to make headlines and be spoken about as it crosses over round $10 increments; most recently it was the $70 per barrel level. Oil also becomes a hot topic around the summer driving season, which officially starts in the US with Memorial Day weekend. All of these factors for global oil come at a time when inflation around the world is running very low and energy cost increases could break the world out of the low inflation rut it has been stuck in for a long time. Currently, the global markets seem to be thinking the risks in oil prices are to the upside and not the downside, which is precisely why President Trump took a shot at OPEC last week. Historically, voters do not like the incumbent president if gasoline prices are significantly higher than they were before that president took office, which is exactly the dichotomy President Trump finds himself in. If prices remain high going into the midterm elections, expect President Trump to become more and more verbose about his displeasure with oil prices.

 

Hybrid model performance and update

For the trading week ending on 4/20/2018, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2018 YTD Since 6/30/2015

(Annualized)

Aggressive Model -0.33% -2.21% 5.34%
Aggressive Benchmark 0.39% 0.01% 6.45%
Growth Model -0.31% -1.55% 4.72%
Growth Benchmark 0.32% 0.13% 5.20%
Moderate Model -0.29% -1.12% 3.76%
Moderate Benchmark 0.23% 0.23% 3.92%
Income Model -0.40% -1.45% 3.18%
Income Benchmark 0.12% 0.32% 2.26%
Quant Model -0.67% -5.65%
S&P 500 0.52% -0.13% 9.63%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were several changes over the course of the previous week in the hybrid models. The first change last week was to raise some cash through the sale of part of the hedging position (DXSSX) in the hybrid model as signals came in that the volatility in the markets was likely going to abate as we move further into earnings season. The next change was to increase the position in the emerging markets momentum ETF (PIE) as strength continues to build for the investment class as investors look outside of the US for growth that is not hampered by rising rates in the US. A position in short term high yield bonds was also initiated last week, trying to take advantage of rising rates here in the US. The final two purchases (initial steps into the positions) last week in the hybrid models were into two more ETFs, one being the John Hancock Multifactor Technology fund (JHMT) and the other being a Small Cap Growth ETF (SLYG). The technology fund (JHMT) provides exposure to technology, but not as broad-based technology as other funds, as the fund screens and then weights the holdings based on company size, relative price and profitability. SLYG is a pure small cap growth ETF, meaning it invested in small cap companies that are growth oriented. Both SLYG and JHMT provide the hybrid models with exposure to areas of the market that have been strategically underweighted as both technology and small cap stocks look to deliver on their earnings reports over the next few weeks. As is typically the case, all the funds that were purchased and sold last week were done so without any transaction costs.

 

Market Statistics:

 

Index Change Volume
NASDAQ 0.56% Average
S&P 500 0.52% Average
Dow 0.42% Above Average

 

Volume picked up last week when compared to what we have seen for the past several weeks. The Dow was the only index that experienced above average volume, as measured by the average weekly volume of the index over the past 12 months. Earnings season was the primary driving force behind the uptick in volume that was seen on the indexes.

 

The following were the top 5 and bottom 5 performing sectors over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Oil & Gas Exploration 3.99%   Biotechnology -0.94%
Energy 2.68%   Home Construction -1.59%
Aerospace & Defense 2.55%   Consumer Staples -2.91%
Broker Dealers 2.51%   Consumer Goods -4.31%
Healthcare Providers 2.49%   Semiconductors -4.79%

 

Oil prices continued to push higher last week, driving up the Oil and Gas Exploration and Energy sectors as they turned in the top performance of any sectors for the week. Aerospace and Defense came in third as earnings are expected to be shown as very strong during the first quarter when they start to be released this week. Financial Broker Dealers came in fourth as rising rates appear to be helping the sector, while Healthcare Providers took the fifth and final spot on the positive side, gaining almost two and a half percent. On the negative side last week, Semiconductors saw the worst performance of any sector, declining nearly 5 percent as trade war talk combined with uncertainty over future chip demand from Apple drove the whole sector lower. Consumer Goods and Staples took the next two worst performing sector spots last week as increased costs of raw materials and rising concerns about the ability to pass along increasing costs hit the sectors at the same time. Home Construction came in fourth from the bottom last week as rising costs on lumber from Canada, due to a US tariff, has meaningfully increased the cost of building a new home. Home builders had warned that with rising costs and a solid supply of existing homes in many markets around the US, they could see a slowdown in demand, which seems to be materializing. Biotechnology took the fifth and final spot on the negative performance list last week as the group came under some pressure from a few heavily weighted stocks in the sector.

 

The US fixed income market was much more exciting than is normally the case last week as we saw a continued flattening of the yield curve as the long end decreased by more than 2 percent while the short end of the curve increased. While this flattening was going on, we also saw the 10-year US Treasury bond make a run at a 3 percent yield, ending the week last week at the highest yield we have seen for several years and within easy striking distance of 3 percent. A three percent yield on a treasury may not sound like a big deal, but it is important to remember that many blue-chip dividend paying stocks pay between 2 and 3 percent and investors have equity risk to their positions. At some point, the premium given by being in stocks versus bonds is not worth it and investors could choose to sell stocks and buy bonds as they are providing enough yield for what they are looking to do. This investment dilemma is why the markets are so interested in where the yield on the 10-year is and how increases to 3.25 or 3.5 could have an adverse impact on the stock market.

 

Fixed Income Change
Long (20+ years) -2.02%
Middle (7-10 years) -0.98%
Short (less than 1 year) 0.02%
TIPS -0.65%

 

Best and Worst Currencies Change
US Dollar 0.76%
Russia ruble 1.56%
Venezuela bolivar -16.81%

 

 

The US dollar had a positive week last week, advancing 0.76 percent against a basket of international currencies. The best performing currency last week was found in Russia with the ruble, as the currency recovered some of the nearly 7 percent it declined two weeks ago. The worst performing currency last week globally was found in Venezuela as the bolivar declined by 16.81 percent. The bolivar has been a pawn in the economic tug of war between the Venezuelan government and the rest of the world for some time now and last week news broke that oil production within the country had declined significantly as the country cannot repair rigs as they break down due to lack of parts and partnerships with the international oil producing community.

 

Commodities were mixed last week, with modest gains in oil:

Metals Change   Commodity Change
Gold -0.64%   GS Commodity Index 1.16%
Silver 2.87%   Oil 1.48%
Copper 2.85%   Livestock -0.56%
      Grains -2.51%
      Agriculture -0.32%

 

The GS Commodity index posted a gain of 1.16 percent last week, driven primarily by oil. Oil continued to push higher last week, albeit at a slower rate than two weeks ago, as it gained 1.48 percent. Silver and Copper posted gains last week, advancing by 2.87 and 2.85 percent, respectively, while Gold bucked the trend and moved lower by 0.64 percent. Soft commodities were negative last week as Livestock declined 0.56 percent, while Agriculture overall decreased by 0.32 percent and Grains posted a decline of 2.51 percent.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
RTS Index Russia 3.74%   PSEi Philippines -2.19%
SX All Share Sweden 2.88%   Shanghai Composite China -2.77%

Last week was a second strong week in a row for the global financial markets with 76 percent of the major indexes posting gains for the week. Russia’s RTS index posted the largest gain last week of any of the global indexes, advancing 3.74 percent. Much like the ruble, much of the gain seen last week in the RTS index is likely due to bargain hunters coming in and buying stocks in the index after it was down more than 10 percent two weeks ago. China’s Shanghai index posted the largest decline globally last week, declining by 2.77 percent, as the world is still waiting to see how the trade war rhetoric will actually turn out, with both sides seemingly changing their positions on an almost daily basis, depending on who is speaking.

The back and forth pattern of gains followed by losses and losses followed by gains for the VIX on a weekly basis finally broke last week as the VIX posted a second week in a row of declines, giving up 3.04 percent for the week. Overall, last week was a very tame week for the VIX except for a large move at the end of the day on Thursday as a single trader made a very large bet in the options market that the S&P 500 would decline significantly (more than 30 percent), driving the calculation of the VIX higher than it would have been without the large trade. This action had some market participants calling for caution when looking at VIX movements as it can be relatively manipulated with large enough trades. With the current VIX reading of 16.88, a move of 4.87 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases with the primary focus of the releases being the US consumer. There was a single release that beat expectations (highlighted in green below) and one that missed market expectations (highlighted in red below).

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Positive 4/16/2018 Retail Sales March 2018 0.60% 0.40%
Neutral 4/16/2018 Retail Sales ex-auto March 2018 0.20% 0.20%
Negative 4/16/2018 Empire Manufacturing April 2018 15.8 20.0
Neutral 4/17/2018 Housing Starts March 2018 1319K 1268K
Neutral 4/17/2018 Building Permits March 2018 1354K 1315K
Slightly Positive 4/19/2018 Philadelphia Fed April 2018 23.2 21

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week, the economic news releases started on Monday with the release of retail sales for the month of March, which posted a notable improvement from the decline (-0.1 percent) we saw in February as the March reading came in at a 0.6 percent increase in overall sales. Retail sales excluding auto sales increased a more modest 0.2 percent, which was in line with market expectations. Both retail figures seem to be pointing toward strength in the US consumer, a positive development for the US economy overall. Later during the day on Monday, the Empire Manufacturing index for the month of April was released, missing market expectations with the tariffs on steel and aluminum being partly blamed despite those tariffs not being fully in place for most of the month. On Tuesday, housing starts and building permits kicked off the March data sets related to the US housing market, with both releases coming in very close to market expectations, despite the headwind of rising lumber costs coming out of Canada. Wrapping up the week last week was the Thursday release of the Philadelphia Fed Index, which was noticeably different than the Empire manufacturing release earlier in the week as the Philly Fed index showed a slight increase on a month-over-month basis.

 

This week is an important week for economic news releases, with the focus of the week being on the US economy. Releases that have the most potential to impact the overall markets this week are highlighted in green:

 

Date Release Release Range Market Expectation
4/23/2018 Existing Home Sales March 2018 5.57M
4/24/2018 New Home Sales March 2018 631K
4/24/2018 Consumer Confidence April 2018 126.1
4/26/2018 Durable Orders March 2018 1.90%
4/26/2018 Durable Goods –ex transportation March 2018 0.60%
4/27/2018 GDP-Adv. Q1 2018 2.10%
4/27/2018 Chicago PMI April 2018 56.3
4/27/2018 University of Michigan Consumer Sentiment Index April 2018 98

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week the economic news releases start on Monday with the release of the existing home sales figure for the month of March, which is expected to show little change over the February reading of 5.5 million units. New home sales, released on Tuesday, are in the same boat as existing home sales, with little change expected from the February levels when the March release occurs. Overall, the housing related figures that have been released so far and the ones upcoming this week seem to be painting a very different picture than the one the home builders are seeing as rising lumber costs are increasing home building costs. The home builders are perhaps a little more vocal about their discontent to get tariffs lowered. Also released on Tuesday is the latest reading of consumer confidence, which if the retail sales figure last week is any indication, could be a nice positive surprise on the confidence index. On Thursday, durable goods orders, both including and excluding transportation, are set to be released with expectations that both readings will come in at about half of what was seen in February. On Friday, the advanced release of the first quarter GDP estimate is set to be released by the government and expectations are a reading of 2.1 percent, down from the fourth quarter reading of 2.9 percent. The decline in growth will most likely be called out as being due to strong holiday sales, as is normally the case. The April reading of the Chicago PMI will be largely overshadowed on Friday by GDP; it would take a surprise move under 50 to really have any impact at all on the markets. Wrapping up the week this week is the University of Michigan’s Consumer Sentiment Index for the month of April (mid-month reading), which is expected to be little changed when compared to the end of March reading. After many speeches given by Fed officials last week, this week we enter a quiet period ahead of the May 2nd FOMC meeting, so there are no speeches being given by Fed officials.

 

Interesting Fact Just how big is GE?

 

The following are a few interesting facts about GE that were complied by Fortune.

 

  1. An airplane with a GE engine takes off every two seconds.
  2. GE healthcare devices generate 16,000 scans per minute.
  3. GE’s various power generation groups generate one-third of the world’s electricity.

 

Source: Fortune

 

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For a PDF version of the below commentary please click here Weekly Letter 4-16-2018

Commentary quick take:

 

  • Major developments:
    • Up week for the markets
    • Slightly less volatile trading week than recent past
    • Trade war could be off—for now

 

  • US:
    • President Trump continues to unabashedly be himself
    • Speaker Ryan’s decision: a bad sign for Republicans?
    • Gridlock is good
    • First quarter 2018 earnings season has started

 

  • Global:
    • China softens trade war talk
    • Syria uncertainty
    • US strike on chemical facilities

 

  • Hybrid investments strategy update:
    • Several changes
    • Some cash put to work
    • Defensive positing remains

 

  • This week for the markets:
    • Earnings season picks up
    • Fallout from Syria
    • Trump legal battle

 

  • Interesting Fact: The world’s oldest continuously inhabited city

 

Major theme of the markets last week: Flip-flops around!

The markets finally took a breather from the turmoil of the past few weeks and moved higher for most of last week. Most of the movement came from changes in political stances, starting with President Trump himself. Early last week, Chinese President Xi Jinping gave a speech that really toned down the trade war rhetoric from China. President Trump took to Twitter, saying he thought both sides would be able to work things out. The global financial markets cheered this development in a potential trade war between the US and China. There was also an about face on the Trans Pacific Partnership (TPP) as President Trump told his new economic advisor Larry Kudlow to see about having the US rejoin the TPP negotiations. On Syria, President Trump initially scared the global markets when he tweeted that missiles were coming to Syria following an alleged chemical attack near Damascus. A few days later, however, following his decision coming in “24 to 48 hours,” President Trump tweeted that he didn’t specify when missiles would be coming to Syria. Global markets cheered this change of heart as well and fears of a full blown cold war between Russia and the US abated. This changed on Friday night, however, as the US, together with the UK and France, carried out strategic military strikes on chemical related military sites in Syria. The above-mentioned changes in President Trump’s stance on a wide variety of topics was what fueled the markets’ rally last week, but could also lead to more uncertainty in the near term if he goes back on any of his less threatening stances from the past week. The uncertainty over future Presidential actions is likely what kept the VIX higher than one would have expected given the significant gains seen in the US equity markets.


US news impacting the financial markets:

 

The US financial media, during the first half of the week last week, focused on the cooler heads that seem to be prevailing concerning the potential global trade war and the situation unfolding in Syria. The week was not without its fair share of political turmoil as special investigator Muller appears to be closing in on President Trump with raids on Trump’s personal attorney in New York on Wednesday. News of the raids by the FBI saw the markets move down in a knee jerk fashion, but not enough to wipe out the gains that had been building on the major indexes during the day. Infrastructure was one sector that took a political hit last week, shortly after Speaker of the House Paul Ryan announced that he would not be seeking reelection this coming November.

 

Citing a personal reason of wanting to be at home for his kids growing up, Speaker Ryan’s surprise announcement left the US financial markets trying to figure out if he was not running for family reasons or if he has a feeling about how the mid-term elections will turn out. Democrats are thinking they have a very good chance of taking the House with the mid-term elections and Paul Ryan’s choosing not to run may further embolden the Democrats. Many of the conservative pieces of legislation on the agenda, such as entitlement reforms and some discretionary spending items, now look like they will not be completed before November or after if the Democrats take the House. The financial markets in the US see some of the best performance, on a historical basis, when Washington DC is not controlled by one party, having either a split in Congress or a split between a uniform Congress and the White House. Political gridlock has proven time and time again to be a good thing as neither party is able to push through their pet projects and yet major pressing pieces of legislation that are needed somehow get done.

 

Last week, the first quarter 2018 earnings reporting season officially kicked off as the big banks started to report their earnings. Below is a table of the well-known companies that released earnings last week. There were no releases that missed expectations and no releases and significantly beat market expectations:

 

Blackrock 4% Delta Air Lines 1% PNC Financial 0%
Citigroup 4% JPMorgan Chase 4% Wells Fargo 5%

 

Large financial institutions turned in solid results that slightly beat market expectations. The results were not cheered by the markets, however, with most of the large banks turning in negative performance on Friday, following the results being released. The positive impact of tax reform was not as strong as anticipated in the earnings results and could have been one of the driving factors of the sector moving lower following the release of the reports. Delta Airlines turned in a solid and steady quarter, posting results that were largely in line with market expectations. One potential headwind that was brought up on the analyst call following the release was the potential negative impact of further increasing oil prices, should prices stay above $70 per barrel for an extended period.

 

This week is the second official week of earnings reporting for the first quarter of 2018 and we really see a pick up in the number of companies reporting results. In total, almost 16 percent of the S&P 500 component companies will report this week. The table below shows the companies that will be releasing their earnings this week with those that have the greatest potential to move the markets highlighted in green:

 

Alcoa Honeywell Progressive
Abbott Laboratories IBM Philip Morris
American Express JB Hunt Charles Schwab
Bank of America Johnson & Johnson Schlumberger
Baker Hughes Kinder Morgan Stanley Black & Decker
Bank of New York Mellon Manpower Taiwan Semiconductor
Blackstone Group Mattel Textron
CSX Morgan Stanley United Continental
Danaher Netflix UnitedHealth
General Electric Nucor United Rentals
Genuine Parts Novartis US Bancorp
Goldman Sachs Procter & Gamble Waste Management

 

Several key sector and industry leaders are most likely to sway the market when they report their results, with Netflix being perhaps the most anticipated release of the week. Netflix, being one of the FAANG stocks, has seen outstanding performance over the past few quarters and investors will be eagerly awaiting results to see if the stock can continue to push higher. Rounding out the large banks this week are the likes of Goldman Sachs, Bank of America, Morgan Stanley and US Bancorp. If Friday’s round of earnings reports and market reaction is any indicator, we could see downward pressure on the big financial institutions following their releases this week. Industrial leaders such as Honeywell, General Electric and Alcoa could steer the direction of future sector earnings for the quarter, especially if the fear of a trade war weighs heavily in the forward guidance from any of the companies. Earnings expectations this quarter are priced for perfection. Any misses will likely hit harder than usual when the stock starts trading after the announcement. Meeting expectations of Wall Street may also not be good enough for the markets, as we saw last week after several of the large financial institutions posted their results.

 

Global news impacting the markets:

 

Global news last week focused on two main topics: China and Syria. In China last week, President Xi Jinping gave a speech that was very encouraging toward a future partnership with the US on trade policies. Gone was the bombastic language seen from other Chinese officials over the past few weeks as doors appeared to be opened by the President, so much that even US President Trump tweeted that he thought they could work together following the speech. A few key points of the speech include statements that China will increase its imports from around the world, make its domestic markets more accessible to foreigners, lower tariffs on imported autos and increase intellectual property laws within China. Many Wall Street analysts that focus on China were surprised by the number of changes President Xi outlined during the speech and, as a result, increased their outlook for the growth in the Chinese economy overall, should the items mentioned be completed expeditiously. Global headlines last week were not all positive, however, as Syria continues to be a tricky situation for all parties involved.

 

After a suspected chemical gas attack took place in a rebel held enclave near Damascus last weekend, the global community came together to condemn the action and seek punishment for the Assad regime. The Assad regime is currently being propped up by Russia and Russia vetoed a UN resolution regarding the suspected gas attack. This action by Russia sparked fears of another cold war, a term that the Russians late last week said was already underway between the US and Russia. The US threatened to retaliate with missile strikes on chemical facilities and air force installations in Syria under Syrian control. Russia said that it would attack US missile launch sites should the US fire anything into Syria. The US, UK and France followed through on their threat of attacking Syrian chemical facilities on Saturday night as three suspected sites were hit and destroyed. In general, financial markets do not react well when there is military action by the US somewhere in the world, especially in an area that could have such a meaningful impact on the global oil market. We saw oil move up to more than $70 per barrel last week for the first time in several years, despite US oil production continuing to ramp up, as a terrorism/war premium seemed to be added to prices. The events in Syria also play into the US strategy for dealing with Iran, which is very uncertain given the political minds that President Trump is relying on around him to help him make well informed decisions. The situation in the Middle East does not look like it will be solved any time soon and, with that, markets around the world will likely stay a little more on edge than they otherwise would be for the time being.

 

Hybrid model performance and update

For the trading week ending on 4/13/2018, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2018 YTD Since 6/30/2015

(Annualized)

Aggressive Model 0.07% -1.88% 5.51%
Aggressive Benchmark 1.48% -0.38% 6.34%
Growth Model 0.10% -1.24% 4.87%
Growth Benchmark 1.15% -0.19% 5.12%
Moderate Model 0.08% -0.83% 3.90%
Moderate Benchmark 0.83% 0.00% 3.86%
Income Model -0.01% -1.06% 3.36%
Income Benchmark 0.43% 0.20% 2.23%
Quant Model 1.95% -5.01%
S&P 500 1.99% -0.65% 9.50%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were three changes to the hybrid models over the course of the previous week, with one being to lower risk and two being the repositioning of cash. The first change was to sell half of the remaining position in the S&P 500 low volatility fund (SPLV) as the fund has a heavy weighting toward utilities, which look like they could be weak during the coming earnings season. The second change last week was the purchase of the Rydex Midcap Growth mutual fund (RYBHX). This fund is a mutual fund that focuses on the mid cap growth investment universe. The mid cap market sector and the growth side of mid caps looks poised to be the beneficiary of increasing merger and acquisition activity over the coming months. Corporate America has a lot of cash on their books and even more once you count the amount that is being repatriated back to the US from abroad. We also find the current environment in a curious spot with borrowing rates likely to increase over the next several quarters as the Fed continues its path of raising rates. With costs of debt rising and cash needing to be used, it seems logical that some companies will use the situation to their advantage, purchasing smaller competitors, of which many find themselves classified as mid cap growth companies. The second purchase of the week last week was purchasing an initial position into an Emerging Markets momentum ETF (PIE). The fund focuses on investing in the companies that are part of the MSCI emerging markets index that have the most momentum over the past 6 months. Purchasing this fund accomplished two things. It increased the exposure in the hybrid models to foreign investments and it increased exposure to investments that have been technically the strongest in the recent past. Both tenants of the fund are opposite of many of the characteristics of the equity holdings that make up a significant part of the hybrid holdings and provide good diversification to the current allocation.

 

Market Statistics:

 

Index Change Volume
NASDAQ 2.77% Below Average
S&P 500 1.99% Below Average
Dow 1.79% Below Average

 

The classic risk-on trade was in full swing last week, when looking at the movement of the three major US indexes as well as the sector performance. Overall volume for the week was below average, despite the start of earnings season, which typically increases the average volume seen daily by a little. With less than 5 percent of companies reporting earnings, the lack of volume could have come from the lack of a significant percentage of companies reporting earnings during the week. Over the coming weeks, we will likely see an increase in volume as corporate earnings result in higher than usual activity as investors adjust positions in the holdings.

 

The following were the top 5 and bottom 5 performing sectors over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Oil & Gas Exploration 7.66%   Consumer Service 0.37%
Energy 6.18%   Consumer Staples 0.13%
Natural Resources 5.75%   Utilities -1.05%
Semiconductors 5.07%   Residential Real Estate -1.18%
Biotechnology 4.88%   Home Construction -2.81%

 

There were two key themes in the sector performance last week: oil and risk-on trading. Oil spiked higher last week by more than eight percent as fears of increasing tensions in the Middle East over Syria boosted fear premiums on oil. Oil and Gas Exploration led the sector performance higher, gaining 7.66 percent, while Energy overall came in second with a gain of 6.18 percent. Natural Resources took third as it was boosted by the movement in the price of oil. In more classic risk-on trading, Biotechnology and Semiconductors took the fourth and fifth spots last week as investors moved from less risky sectors toward sectors with more risk. The bottom five performing sectors last week were almost exactly what would be expected in a classic risk-on trading environment. One outlier emerged last week from the risk-on trading and was the worst performer of the week last week, Home Construction. Home Construction declined by 2.8 percent last week after announcements came out from some of the major builders that tariffs on Canadian lumber coming into the US was increasing building costs and could adversely impact the US housing market. The next four bottom performing sectors were all classic risk-off sectors, with Real Estate and Utilities posting declines for the week, while Consumer Staples and Consumer Services posted small gains.

 

In the US fixed income markets last week, we saw a flattening of the yield curve as the short end of the curve increased in value while the longer end came down. This decrease in the long end of the yield curve also drove up the yield on the long-dated bonds as they started to move toward three percent once again, as they did back in February. This increase in bond yields could potentially become a headwind for the overall markets as some investors would rather collect their needed yield from fixed income investments than equity investments that are perceived to be riskier.

 

Fixed Income Change
Long (20+ years) -0.17%
Middle (7-10 years) -0.33%
Short (less than 1 year) 0.03%
TIPS 0.21%

 

Best and Worst Currencies Change
US Dollar -0.38%
Chile peso 1.51%
Russia ruble -6.80%

 

 

The US dollar had a negative week last week, falling 0.38 percent against a basket of international currencies, breaking a two-week run of gains. The best performing currency last week was found in Chile with the Chilean peso, which gained 1.51 percent against the US dollar. The worst performing currency last week globally was found in Russia as the ruble declined by 6.8 percent. The decline in the ruble seemed to be due to the increased tensions between the US and Russia over the situation in Syria and Russian’s backing of President Assad.

 

Commodities were all positive last week, led higher by a large gain in the price of oil:

Metals Change   Commodity Change
Gold 0.84%   GS Commodity Index 5.40%
Silver 1.62%   Oil 8.31%
Copper 0.50%   Livestock 3.78%
      Grains 0.07%
      Agriculture 1.01%

 

The GS Commodity index posted a gain of 5.4 percent last week, driven primarily by oil. Oil spiked higher by 8.31 percent last week, as increased tension in the Middle East ultimately ended with the US carrying out very strategic strikes in Syria against suspected chemical weapons related sites. Gold, Silver and Copper posted gains last week, advancing by 0.84, 1.62 and 0.5 percent, respectively. Soft commodities were also positive last week as Livestock advanced 3.78 percent, while Agriculture overall increased by 1.01 percent and Grains posted a small gain of 0.07 percent.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Tel Aviv Israel 5.03%   BIST 100 Turkey -4.47%
Hang Seng Hong Kong 3.23%   RTS Index Russia -10.67%

Last week was a strong week for the global financial markets with 87 percent of the major indexes posting gains for the week. Israel’s Tel Aviv Composite index posted the largest gain last week of any of the global indexes, advancing 5.03 percent. Most of this gain was a bounce back from the decline of more than 3 percent that was seen two weeks ago when the same index was the worst performing index of the global markets. Russia’s RTS index posted the largest decline globally last week, declining by 10.67 percent, as the country now finds itself at odds with almost all other countries in the world after failing to condone or attempt to stop the usage of chemical weapons in Syria.

The back and forth pattern of gains followed by losses and losses followed by gains for the VIX on a weekly basis held true last week as the VIX declined almost 19 percent. While a 19 percent move downward in the VIX may seem like a large amount, it was relatively small when compared to the gains seen in the overall markets and the historical relationship between market movements and corresponding VIX movements. Now that the air strikes have been carried out by the US, UK and France in Syria, we could see the VIX come down a little more as it is one unknown that has become known. With the current VIX reading of 17.41, a move of 5.03 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases with the primary focus of the releases being inflation in the US economy. There were no releases that meaningfully beat or fell short of market expectations.

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/10/2018 PPI March 2018 0.30% 0.20%
Neutral 4/10/2018 Core PPI March 2018 0.30% 0.20%
Slightly Positive 4/11/2018 CPI March 2018 -0.10% 0.10%
Neutral 4/11/2018 Core CPI March 2018 0.20% 0.20%
Neutral 4/11/2018 FOMC Minutes Previous Meeting NA NA
Slightly Negative 4/13/2018 University of Michigan Consumer Sentiment Index April 2018 97.8 100.6

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Economic news releases kicked off on Tuesday last week with the release of the Producer Price Index (PPI) for the month of March, which came in slightly higher than expected when looking at both overall PPI and the core calculation of PPI. The increase in PPI was not enough to cause concern about inflation in the overall US economy. On Wednesday, the Consumer Price Index (CPI) for the month of March was released and showed a very different reading on inflation than the PPI released the previous day. The overall CPI decreased by one tenth of a percent when the market had been expecting a gain of one tenth of a percent, while the core reading of CPI came in at 0.2 percent, which was the market expectation. This divergence between core CPI and overall CPI was almost entirely due to energy costs, as the price to fill up vehicles in the US rose significantly as the price of oil increased through much of the month on fears of increased tension in the Middle East. The FOMC meeting minutes from the March meeting were released on Wednesday and held no significant additional information as the Fed still looks to be on track for three or four hikes during 2018. Last week wrapped up on Friday with the release of the University of Michigan’s Consumer Sentiment Index for the month of April (end of March reading), which came in unexpectedly low, falling below 100 for the first time since the end of February reading of 99.7.

 

This week is a relatively slow week for economic news releases, with the focus of the week being on the US consumer. Releases that have the most potential to impact the overall markets this week are highlighted in green:

 

Date Release Release Range Market Expectation
4/16/2018 Retail Sales March 2018 0.40%
4/16/2018 Retail Sales ex-auto March 2018 0.20%
4/16/2018 Empire Manufacturing April 2018 20.0
4/17/2018 Housing Starts March 2018 1268K
4/17/2018 Building Permits March 2018 1315K
4/19/2018 Philadelphia Fed April 2018 21

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week, the economic news releases start on Monday with the release of retail sales for the month of March, which are expected to show a notable improvement from the decline (-0.1 percent) we saw on the February print, as markets are expecting the gain for March to be 0.4 percent. Retail sales excluding auto sales are expected to post a gain of 0.2 percent, which is the same as the reading in February. Later during the day on Monday, the Empire Manufacturing index for the month of April is set to be released with expectations of a slight slowdown from the fast increase in manufacturing seen in March. The markets will be watching very closely for any impact of tariffs on manufacturing in this report. On Tuesday, housing starts and building permits kick off the March data sets related to the US housing market, but from the comments released by some of the home builders, these numbers could come in below market expectations. Wrapping up the week this week is the Thursday release of the Philadelphia Fed Index, which, much like the Empire Manufacturing index, is expected to post a slower advance than was seen in March. In addition to the scheduled economic news releases, this week is one of the busiest weeks that I can remember for Fed officials making speeches and statements, with 16 speeches being given throughout the week.

 

Interesting Fact — The world’s oldest continuously inhabited city

 

Damascus is widely believed to be the oldest continuously inhabited city in the world, with evidence of habitation dating back at least 11,000 years. Its location and persistence have made the city a nexus for civilizations come and gone. Today, its metropolitan area is home to about 2.5 million people, and in 2008 it was named the Arab Capital of Culture.

 

Source: http://www.mnn.com

For a PDF version of the below commentary please click here Weekly Letter 4-9-2018

Commentary quick take:

 

  • Major developments:
    • Wild week for the markets
    • The Art of War versus The Art of the Deal
    • All eyes are on President Trump

 

  • US:
    • Emotional trading on President Trump’s words
    • Trade war fears spooked markets
    • Earnings season lofty expectations

 

  • Global:
    • All eyes on the US
    • Two Central Bank meetings
    • Germany slowing down?

 

  • Hybrid investments strategy update:
    • Several changes
    • More defensively positioned
    • Uncertainty over Facebook

 

  • This week for the markets:
    • Earnings season begins
    • Syrian uncertainty
    • Trade War talk continues

 

  • Interesting Fact: German economy really matters

 

Major theme of the markets last week: Rollercoaster week, to say the least

Last week felt like a rollercoaster with defined ups and downs in the markets. The week started with the US markets in a free fall after China announced its own target list of 106 US imported products being considered for tariffs. Things settled on Tuesday and the markets began what turned out to be a three-day rally as various administration officials said they were negotiating the tariffs with China. The end of the rally on Thursday culminated with the Dow gaining more than 1,000 points in less than thirty hours, one of the strongest rallies for the Dow that we have seen. On Thursday evening, however, President Trump seemed to undermine members of his own administration by announcing that he was instructing members of the Department of Commerce to come up with other ways to punish China for what has been termed “unfair business practices,” such as stealing intellectual property and restricting US investment. The potential for increasing the stakes of a trade war spooked the markets on Friday and sent the Dow at one point down more than 750 points for the day before coming back a little at the end of the day. Uncertainty seems to abound over what President Trump will do or say. The brewing trade war between the US and China has left the markets on edge. We will likely not get any closure on the topic for 30 to 60 days, as this is the waiting period for many of the proposed tariffs before they can be implemented in the US. China, on the other hand, can announce potential tariffs and impose them much more quickly as the government has very few checks and balances built into its command and control government. The markets will likely move wildly during negotiations as both sides try to figure out what is best for themselves. A term that came out last week that summed up the situation very well is, “The Art of War versus The Art of the Deal.”

 


US news impacting the financial markets:

 

The primary news last week in the US that impacted the US financial markets was political, in the form of President Trump and administration officials trading barbs over a trade war with Chinese officials. The markets were on edge with every tweet and back-and-forth exchange between the two sides, as has been the case for the past month. Tensions escalated last week as President Trump mulled over adding an additional $100 billion in goods to the tariff list. This figure was significant because, in total now, the goods subject to tariffs from China to the US would total about $150 billion, which is $20 billion higher than the total amount of imports to China from the US. With that imbalance, in order to keep up the tit-for-tat, China would need to make policy changes outside of imports to look like the victor in the trade war. One of the most likely potential targets is China’s massive pile of US debt, not to sell it outright on the open market, but to potentially step back as a major buyer of government issued debt. China could also look at restricting US ownership of Chinese companies as well as other measures to significantly drive up the cost of goods needed in the US coming from China. Semiconductors was one area hit hard last week as China could cause a small bottle neck to the semiconductors industry that could have adverse impacts on many sectors of the global economy. One of the major concerns of the markets last week, and many weeks before, is that the markets do not know if the statements from the administration are measured and calculated or if they are simply off the cuff. Seemingly off the cuff statements, especially by President Trump, increase the likelihood of a miscalculation in trade negotiations, which China would likely exploit. Administration officials not being on the same page as the President last week was what drove most of the market volatility and will likely continue to do so in the future.

 

Looking past the potential trade war, many financial news outlets focused on the upcoming earnings season, which officially kicks off at the end of this week as three of the big banks report their earnings. The following companies report earnings this week, with companies highlighted in green having the most potential to move the markets:

 

Blackrock Delta Air Lines PNC Financial
Citigroup JPMorgan Chase Wells Fargo

 

Expectations for this quarter’s earnings are extremely high with Factset reporting that analysts expect earnings growth of 17.1 percent on the S&P 500 for the first quarter of 2018. This rate has been steadily increasing over the past several months as the expected earnings growth rate for Q1 2018 at the end of 2017 was only 11.3 percent. The energy sector is the primary driver of much of the increases in expectations as US oil and gas production continues to increase. Guidance for the quarter that has already been released is split about 50/50, with half of companies issuing positive guidance and half issuing negative. Information Technology has been the sector with the highest number of positive guidance revisions at 26 companies. The big question hanging over the upcoming quarterly results is the impact of a potential trade war on future expectations. Uncertainty is the nemesis of a bull market and uncertainty over how the trade war talks will ultimately settle could leave corporate America in a precarious spot, with companies not wanting to sound too bullish on the future, while at the same time trying to downplay the potential negative impact of a trade war on their individual businesses. Another risk to the markets this earnings season is that so much hope seems to be riding on the markets achieving their positive expected results that small misses in expectations are likely to have magnified negative effects. Over the next three weeks we will get a good feel for how the earnings reporting season will turn out. From there, the markets will likely pick the direction it will go for the next few months.

The other data released last week in the US that had an impact on the markets was the labor market data, which indicated that the labor market is currently not as strong as some people thought after February’s stellar payroll numbers. Expectations going into Friday were for unemployment in the US to tick down, but rather it held firm at 4.1 percent and the payroll figures looked downright dismal when compared to the February numbers. This is a positive development concerning the Federal Reserve as the labor market now looks less likely to force its hand at raising rates more than they would otherwise like during 2018 and 2019. Wage inflation also seemed to be kept in check during March, according to the data released Friday, which lessened the fear of inflation picking up in the US due to wages increasing too quickly.

 

Global news impacting the markets:

 

Trade wars were once again the primary topic of the global financial news last week as countries around the world try to figure out what, if any, impact a trade war between the two largest economics in the world could have on their individual countries. There were two central bank meetings last week as the Reserve Bank of Australia and the Reserve Bank of India both held their April meetings. As expected, both meetings held no meaningful changes in their respective countries’ current monetary policies and therefore had little, if any, impact on the broader global financial markets.

 

Economic data out of Germany made headlines late in the week last week as industrial production slid to the lowest levels since mid-2015, while manufacturing orders only picked up a small amount (0.3 percent) during March after declining unexpectedly by 3.9 percent during the month of February. Many investors around the world are suddenly closely watching Germany as the country has been the primary powerhouse of the EU and will likely bear even more burden with the UK officially leaving the EU at some point over the next few years. While the recent data points certainly do not make up a trend, it does raise the need to watch economic data points out of the country to make sure there is not a surprise slowdown in a country so vital to the EU.

 

China made several headlines last week, most of them pertaining to minor members of the Chinese government talking about a trade war with the US. Some of the statements looked and sounded very hastily put together, which is itself a concern as China obviously did not think President Trump would keep ratcheting up the trade war talk; they would have otherwise prepared some remarks to release under different scenarios coming out of the US. One curious thing in the global media was China’s repeated statements that Chinese officials are not currently talking to US officials about tariffs, despite US officials saying they are. One side is not telling the truth and we will likely find out which side relatively soon. This week, Chinese President for life, Xi Jinping, will speak at a very important economic summit, the Boao Forum, which is the Asian equivalent of the World Economic Forum in Davos, Switzerland. It is thought that President Xi’s comments at the forum will likely be aimed at US trade policy as he tries to sway other countries to increase their trading with China to make the US trade between China and the US less impactful to his country. All the Asian countries in the region, as well as many other countries, will be in attendance, including the Managing Director of the IMF, Christine Lagarde. Absent from the forum will be any official US government representatives. Tuesday is the Chinese President’s main speech. It will be very closely watched by investors around the world as he could either take another step forward in the trade war rhetoric or he could tone things down and potentially smooth out some of the volatility seen around the world recently.

 

Hybrid model performance and update

For the trading week ending on 4/6/2018, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2018 YTD Since 6/30/2015

(Annualized)

Aggressive Model -0.17% -1.95% 5.52%
Aggressive Benchmark -0.56% -1.83% 5.83%
Growth Model -0.16% -1.34% 4.87%
Growth Benchmark -0.43% -1.32% 4.73%
Moderate Model -0.14% -0.90% 3.90%
Moderate Benchmark -0.30% -0.83% 3.58%
Income Model -0.08% -1.05% 3.38%
Income Benchmark -0.12% -0.23% 2.09%
Quant Model 0.71% -6.84%
S&P 500 -1.38% -2.59% 8.79%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were a couple changes to the hybrid models over the course of the previous week, all of which were done to further mitigate some of the volatility and potential downside of the current market environment. The first change was to sell the remaining position in financials across all hybrid models. This was done as the sector has seen above average volatility recently and it was driving a significant percentage of the overall downside of the hybrid model. Also, earnings season (discussed above) seems to have priced the financials for perfection, which seems like a tall order given the global uncertainty. The second change was to sell the remaining partial position in the Rydex equal weighted technology fund (RYT) as the sector looks like it could be in for increased volatility over the coming weeks. On Tuesday and Wednesday this week, Facebook CEO Mark Zuckerberg testifies before Congress over the mishandling and breach of user data. It seems highly unlikely that the testimony will be positive for the stock as members of Congress will surely be asking about what kind of government oversight is needed in the industry. With Facebook driving much of the social media sector performance and, ultimately, technology overall, it seems the potential downside currently outweighs the upside. The proceeds from the two sales last week are currently in cash as investment possibilities are being evaluated for strong risk to reward characteristics.

 

Market Statistics:

 

Index Change Volume
Dow -0.71% Average
S&P 500 -1.38% Below Average
NASDAQ -2.10% Average

 

Last week was a negative week for the markets, but the final weekly numbers only tell part of the story. The smallest daily trading range for the Dow last week was 308 points or 1.3 percent. The largest daily trading range of the Dow was 779 points or 3.3 percent. We had not seen a week with more intraweek and intraday volatility since the first week of February when the initial impact of wage inflation and a potential trade war first hit the markets. The S&P 500 and the NASDAQ also had an equally volatile week as the markets grappled with the potential impact of a trade war with President Trump’s mounting rhetoric against China. Overall for the week, volume was at or slightly below average when looking at the three main US indexes.

 

The following were the top 5 and bottom 5 performing sectors over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Home Construction 1.85%   Transportation -2.45%
Energy 1.18%   Technology -2.61%
Healthcare Providers 0.56%   Pharmaceuticals -2.76%
Consumer Goods 0.35%   Semiconductors -4.73%
Residential Real Estate 0.29%   Biotechnology -5.35%

 

Last week saw an interesting mix of sector performance as there were several one-off events that were felt in more broad sectors. On the positive side last week, Home Construction took top honors after Lennar home builders announced a much stronger than expected quarter, causing all the home builders to jump high on the hopes of others having the same good fortune of Lennar. Energy came in second last week, despite a decline in oil prices of more than 4 percent as earnings season for large integrated energy companies is expected to be very strong. Healthcare Providers came in third last week, during what looked to be normal trading in the sector. Consumer Goods and Real Estate rounded out the top five performing sectors as they are both defensive sectors of the markets and were clearly favored over more risky assets. On the flip side last week, the bottom five sectors were led lower by Biotechnology as Incyte (a large biotech/pharmaceutical company) failed on its latest large-scale drug under development with the FDA. The stock sank by more than 20 percent on Friday following the announcement. The decline of Incyte also had a materially negative impact on the Pharmaceuticals sector, which also made the list of bottom performing sectors last week. Semiconductors came in second from the bottom last week as fears over the potential impact of a trade war between the US and China spilled into high technology as many small parts are currently manufactured in China.   Technology, as a sector overall, was drug down enough by the Semiconductors and Biotechnology performance that it too made the negative performance list. Transportation rounded out the bottom performing sectors last week as rail operators as well as long distance trucking companies had a difficult week as analysts attempted to calculate the impact on the sector from a trade war breaking out.

 

US fixed income markets were mixed last week, as investors grappled with what, if any, impact could be seen in the US fixed income markets from a potential trade war. Overall yields increased at the longer end of the yield curve, while they decreased at the short end of the curve.

 

Fixed Income Change
Long (20+ years) -0.44%
Middle (7-10 years) -0.09%
Short (less than 1 year) 0.01%
TIPS 0.10%

 

Best and Worst Currencies Change
US Dollar 0.08%
Canada dollar 0.80%
Turkey lira -2.56%

 

 

The US dollar had a positive week last week, gaining 0.08 percent against a basket of international currencies for the second week in a row. The best performing currency last week was found in Canada with the Canadian Dollar, which gained 0.8 percent as negotiations between the US and Canada, as a part of NAFTA, continued to look like they will ultimately be successful. The worst performing currency last week globally was found in Turkey as the Lira declined by 2.56 percent. It seems the Lira trades adversely to what is going on in Syria; at least it has for the past several weeks.

 

Commodities were mixed over the course of the previous week as precious metals moved higher and oil pushed lower:

Metals Change   Commodity Change
Gold 0.48%   GS Commodity Index -2.10%
Silver 0.13%   Oil -4.43%
Copper 0.44%   Livestock -1.53%
      Grains 1.41%
      Agriculture -0.48%

 

The GS Commodity index posted a decline of 2.1 percent last week, as declines in oil outweighed gains seen in precious metals. Oil fell 4.43 percent last week, despite increased tension in the Middle East as global oil supplies continue to run significantly higher than global demand. Gold, Silver and Copper posted gains last week, advancing by 0.48, 0.13 and 0.44 percent, respectively. Copper, which had been on a decline over fears of global demand during a global trade war, reversed course last week and traded in the same direction as the precious metals for the first time in several weeks. Soft commodities were mixed last week as Livestock declined 1.53 percent, while Agriculture overall decreased by 0.48 percent and Grains posted a gain of 1.41 percent.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
IPC All-Share Mexico 3.91%   SET Thailand -1.53%
FTSE MIB Italy 2.31%   Tel Aviv Israel -3.10%

Last week was a mixed week for the global financial markets with 57 percent of the major indexes posting gains for the week. Mexico’s IPC Composite index posted the largest gain last week of any of the global indexes, advancing 3.91 percent. Much of the gain in the Mexican stock market was due to the ongoing negotiations of NAFTA, which, as mentioned earlier, look like they will ultimately be successful, with all sides coming to an agreement. Israel’s Tel Aviv index posted the largest decline globally last week for the second week in a row, declining by 3.10 percent, as unrest continues in Gaza and the Iranian nuclear deal looks headed for a very uncertain future.

After declining by almost 20 percent two weeks ago, the VIX needed to increase last week to keep the pattern of ups and downs intact and the fear gauge did not disappoint, posting a gain of 7.6 percent for the week. The ultimate weekly change was tame given the large amount of volatility seen during the week, which saw movements of greater than 20 percent on an almost daily basis for the VIX. With the wild gyrations of the stock market over the past few weeks, it seems the VIX will likely remain very uncertain over the coming weeks as the markets try to sort out what could happen between the US and China regarding trading policies. With the current VIX reading of 21.49, a move of 6.2 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases with the primary focus of the releases being the US labor market at the end of the week. There were no releases that meaningfully beat or fell short of market expectations.

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/2/2018 ISM Index March 2018 59.3 60.0
Neutral 4/4/2018 ISM Services March 2018 58.8 59.0
Slightly Negative 4/6/2018 Nonfarm Payrolls March 2018 103K 175K
Slightly Negative 4/6/2018 Nonfarm Private Payrolls March 2018 102K 180K
Neutral 4/6/2018 Unemployment Rate March 2018 4.10% 4.00%
Neutral 4/6/2018 Avg. Hourly Earnings March 2018 0.30% 0.20%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week the economic news releases started on Monday with the release of the ISM index for the month of March, which came in close to expectations and had no noticeable impact the markets, which were jumping higher. On Wednesday, the services side of the ISM index was released and also came in very close to market expectations, having no discernible impact on the overall markets. Friday was a busy day for economic news releases as all the standard employment related data for the month of March was released by the government. The payroll data surprised to the downside when looking at both public and private roll figures. These below expectations prints came after the stellar releases for February. When looking at a two-month average, there was an offsetting effect that dampened what could have been market concern. The overall unemployment rate stayed unchanged at 4.1 percent, having a negligible impact on the markets. Average hourly earnings ticked up by one tenth of a percent in the data release, but it was not enough wage growth to cause alarm in the markets. Trade war rhetoric largely took the spotlight on Friday as the markets were sailing downward well before any of the labor market data was released on Friday.

 

This week is a relatively slow week for economic news releases, with the focus of the week being on inflation in the US economy. Releases that have the most potential to impact the overall markets this week are highlighted in green:

 

Date Release Release Range Market Expectation
4/10/2018 PPI March 2018 0.20%
4/10/2018 Core PPI March 2018 0.20%
4/11/2018 CPI March 2018 0.10%
4/11/2018 Core CPI March 2018 0.20%
4/11/2018 FOMC Minutes Previous Meeting NA
4/13/2018 University of Michigan Consumer Sentiment Index April 2018 100.6

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Economic news releases kick off on Tuesday this week with the release of the Producer Price Index (PPI) for the month of March, which is expected to show a very low level of inflation at the producer level, both overall and when looking at only the core components of the index. On Wednesday, the Consumer Price Index (CPI) for the month of March is set to be released with expectations that inflation at the consumer level increased at a slower rate than it did at the producer level. Both the PPI and the CPI should provide some insight into the amount of inflation currently being seen in the US economy, but the Fed’s favored inflation index is the PCE index, which will be released in a few weeks’ time. The FOMC meeting minutes from the March meeting are also set to be released on Wednesday, which could hold some additional information about the meeting, the markets will be looking closely at the control the new Fed Chair has over the group, specifically dissenting members of the committee. This week wraps up on Friday with the release of the University of Michigan’s Consumer Sentiment Index for the month of April (end of March reading), which is expected to be relatively unchanged over the middle of March reading of 101.4. In addition to the scheduled economic news releases, there are five speeches being made by Fed officials this week, which may provide some insight into the number of times the Fed is looking at raising rates in 2018.

 

Interesting FactGerman economy really matters

 

According to data on Eurostat, Germany accounted for 21.1 percent of total GDP for the EU. As you can see in the chart below, that figure is far larger than any other country. To make matters more interesting, the United Kingdom is in second place, at 16 percent of total EU GDP.

It is no wonder, with the UK leaving, that investors are closely watching what is happening in the German economy.

 

Source: Eurostat

For a PDF version of the below commentary please click here First Quarter 2018 in Review

First Quarter 2018 in Review:

2018 started out much the same way that 2017 ended, with the bulls full in control of the financial markets here in the US as we saw a near constant barrage of new all-time highs on the three major US indexes. The markets heated up even more with the first 18 trading days of the year, representing one of the best starts ever for the Dow as there were only four days of negative performance. However, all good things must come to an end and that end for the US financial markets came on Friday, February 2nd, when the Dow declined by 666 points after fears of inflation sent the 10-year yield jumping higher. The large decline on Friday was followed by an even larger decline on Monday when the Dow traded in a more than 1,000-point trading range, ultimately ending the day 1,175 points lower. The second week of February was remarkable from a numbers standpoint as investors saw unusually large swings in the Dow. In total, we saw four 1,000-point range trading days during the week; there have only ever been seven 1,000-point trading days on the Dow! Investor confidence in the markets was shattered as the prolonged bull market without a 10 percent correction came to an end for the Dow and the S&P 500 on February 8th, with both indexes closing more than 10 percent below their previous high, which occurred on January 26th. The VIX, which during January hit an all time low, spiked high as volatility in the markets picked up, gaining more than 230 percent over the course of six trading days and causing several of the exchange traded volatility products to blow out and register a total loss for investors. The US markets clawed their way back from the early February lows, only to see the volatility pick right back up in mid-March as political madness went into full swing. The first quarter of 2018 ended with the markets coming off their lowest points of the quarter, but only slightly as investors seemed to remain hopeful that the bull market that started the year would somehow come back to life during the second quarter of 2018. There were many factors that drove the extreme volatility of the market during the first quarter, but perhaps none more impactful than political uncertainty out of Washington DC.

 

During the first quarter we saw the US government officially shutdown in mid-January over a funding fight, only to reopen without much alarm on Monday morning. We saw a drawn-out spending fight yet again in February when a single Senator almost shut down the government. The looming threat of a government shutdown returned in late March. The financial markets have been growing more and more immune to the happenings of Congress and the nonsensical budget fights, but the risk of a true government shutdown cannot be fully ignored by the markets. Late in March, a spending bill was agreed to and signed into law that funds the government into October of 2018, just in time for another fight as we head into the mid-term elections. While the markets did not pay a lot of attention to the threats of a government shutdown, the revolving door of staff at the White House did have an impact.

 

Over the course of the first quarter, there were nine high level individuals who left the Trump administration; three were fired and six resigned. The most impactful changes were Gary Cohn (Director of the National Economic Council), Rex Tillerson (Secretary of State) and HR McMaster (National Security Adviser). Gary Cohn resigned in protest after Trump announced his first round of trade tariffs. This negatively impacted the markets because he was one of the few level-headed people in the administration who fully understood how the markets and global economy works. Rex Tillerson’s firing caught the markets by surprise, almost as much as it caught Tillerson by surprise, and adds to the potential unease that global leaders are feeling with the current US administration as Tillerson had many personal relationships with world leaders. HR McMaster resigning was not a surprise, but his replacement being John Bolton caught many by surprise. The markets reacted to Bolton’s new position by pushing oil prices higher around the world and by driving up the aerospace and defense sector. John Bolton has long been known as a political hawk and someone who thinks that hitting first and hitting hard is the best way to deal with rogue regimes around the world, especially North Korea and Iran. The uncertainty over who will surround President Trump and give him advice in the future is one of the biggest uncertainties for the global financial markets and will likely remain so for the foreseeable future.

 

Trade war was one of the main topics that bridged the gap between global financial markets and politics during the first quarter of 2018. At the World Economic Forum held in Davos, Switzerland during the quarter, global trade was the main topic of more than half the sessions, including the closing remarks given by President Trump, during which he said, “America first does not mean America alone.” However, the Trump administration seems to be doing a good job of alienating countries through trade deals that were broken during the first quarter. The biggest change during the quarter came in the form of a tariff on US imports of steel and aluminum, with steel seeing a 25 percent tariff and aluminum seeing a tariff of 10 percent. Exceptions were made to countries that needed more time to try to fall on the good graces of the administration. Aside from seven exceptions, the tariffs went into full effect. China was one of the main targets of the tariffs on steel and aluminum and President Trump went a full step further, coming up with another set of tariffs on only Chinese made products that were being sent to the US. China hit back with its own tariffs against the US, starting with Soybeans, which is one of the largest exports from the US to China. While both sides say they are still actively negotiating, a trade war has officially started and has caused a lot of commotion in the global financial markets. This trade war is exactly was the IMF warned about during the quarter when it called out protectionist trade policies as the single biggest threat to global economic growth in 2018 after it increased its expected growth rate to 3.9 percent for 2018.

 

On the economics front during the first quarter, we saw some very interesting developments that took the market seemingly by surprise. Tax law changes adversely impacted earnings for many large corporations during the fourth quarter of 2017 and were reported on during the first quarter of 2018. Financials took billions of dollars in one-time losses as they look to greatly improve financially in a rising rate economic environment. Rising rates was a persistent theme during the quarter around the world, with the US seeing the yield on the 10-year bond increase from 2.4 percent to start the year all the way to near 3 percent during the middle of March, ending the quarter at 2.75 percent. This increase in yield equated to losses for many fixed income investors as bond prices declined during the quarter. Earnings that were reported during the quarter were strong with a blended growth rate on the S&P 500 for the fourth quarter of 2017 being 14.8 percent with 77 percent of companies beating analyst expectations of earnings. Expectations of strong continued earnings growth is helping to keep the markets elevated. Inflation also made headlines during the quarter as it was faster than expected in wages in January, helping to tip the scales in favor of three or four rate hikes during 2018, which is meaningfully higher than the two hikes that were expected in 2018 at the end of 2017. New Fed Chair Jerome Powell seemed to lean more toward three hikes in 2018 during his press conference following the FOMC meeting in March, at which the Fed raised rates by 0.25 percent.

 

On the international front during the quarter, the focal points were mainly in the US as leaders around the world tried to make sense of what was going on in Washington DC. However, there were a few topics that came up during the quarter that impacted some of the global financial markets. Brexit was a hot topic in the UK for much the quarter as the UK was trying to come up with a divorce bill with the EU, ultimately agreeing on the terms and allowing further negotiations over Brexit to move forward. The breakthrough in the negotiations came late in March as a 21-month extension for navigating the breakup following Brexit day was agreed to by both sides. With the extension in place, it now looks like corporations doing business in the UK have a lot more breathing room to see how all of this will ultimately play out. Elsewhere in Europe, there were various elections held during the quarter with Italy seeing some of the more interesting results. In Italy, the political extreme right and left both took many seats away from the more centrist political parties. These results and the lack of a government currently in Italy due to coalitions trying to be formed has raised the risk of yet another country trying to pull further away from the EU, much like the UK.

 

In Asia during the first quarter, there were a few new developments, with the most potentially impactful being the consolidation of power in China under President Xi Jinping, who managed to change the law in China to make himself President for life. As President for life, Xi Jinping has solidified his power in China as second to only Mao Zedong, the founding father of the People’s Republic of China. Having one known leader in China provides China with the ability to work on long term plans for its economy, especially when it comes to a potential trade war with the US as China works to become a more powerful super power. One of the first tasks of China seems to be trying to reign in North Korea, as North Korea leader Kim Jong-Un continues to wade into the global political landscape.

 

Looking to the future

 

Looking ahead for the US financial markets, it seems volatility will make a prolonged stay with investors likely staying on edge. Large technology companies will be the primary driving force behind the market movements for the near future as the tumble of Facebook and Amazon in March had a noticeable impact on the markets. The risk of politics coming more into play with large technology companies is ever increasing, especially with the latest shadowy data usage of Facebook user data and the potential manipulation of the 2016 elections. Trade wars will likely continue to be a hot topic, but if the deal negotiated with South Korea is any indication of what is to come of the trade wars, President Trump’s bark may turn out to be much worse than his bite. Earnings for the first quarter of 2018, reported during the second quarter of 2018, will be closely watched by Wall Street as this is the first round of earnings under the new tax code. It will be interesting to see what, if any, changes corporate America has made. With the decline in the markets that we saw toward the end of the first quarter it would not be surprising if we see a large round of corporate buy backs being undertaken, which could help drive of earnings per share across the board. One thing is for sure going forward and that is that the slow and steady beat higher of the markets that we saw during last year and the first part of this year is unlikely to return any time soon.

 

Peter Johnson

Callahan Capital Management

 

First Quarter 2018 Numbers:

 

The following is a numerical representation of the first quarter of 2018. Performance for the three major US indexes and the VIX were as follows:

 

Index 1st Quarter 2018
NASDAQ 2.32%
S&P 500 -1.22%
Dow -2.49%
VIX 80.89%

 

The NASDAQ managed to pull off a positive return for the quarter, thanks to a rally in large technology at the very end of the quarter. The S&P 500 came in right in the middle, as is the case frequently as the index bridges the difference between the large Blue-Chip Dow and the more technology heavy NASDAQ. The Dow was the laggard of the three major indexes during the first quarter as General Electric dragged on performance, declining more than 22 percent during the quarter. The VIX had a great first quarter, at one point advancing more than 230 percent. The VIX closed out the quarter 80 percent higher than where it started and is currently above the longer run average of the VIX. However, as we saw during the last quarter, the VIX can move in wild fits and starts, so it is anyone’s guess as to where the VIX will go from here.

 

Globally, the financial markets around the world had a difficult first quarter with only 28 percent of the indexes turning in positive results. The top three performing indexes for first quarter of 2018 were:

 

Country Index 1st Quarter 2018
Brazil BOVESPA 11.7%
Russia RTS Index 8.0%
Czech Republic PX 50 4.2%

Brazil turned in the top performance of the quarter with a gain of more than 11 percent on the main Sao Paulo based BOVESPA index. Brazil had several political changes occur during the quarter that were positive, with the main change being the continued crack down on political corruption. There is a general election in Brazil later this year and investors in Brazil seem to think that corruption will finally be kicked out and Brazil will get back to working with multinational companies and continuing to expand their economy.

 

Globally, the bottom three performing indexes for the first quarter of 2018 were:

 

Country Index 1st Quarter 2018
Japan Nikkei 225 -7.1%
U.K. FTSE 100 -8.2%
Poland WIG -8.4%

 

Poland took the bottom honors for the first quarter as the country was mired in a political mess for most of the quarter with current Polish President Andrzej Duda fighting against the ruling Law and Justice political party on many different topics, including how the country interacts economically with the EU.

Currency Change
US Dollar -1.8%
Mexico peso 8.3%
Venezuela bolivar -99.98%

When looking at currency movement around the world during the first quarter of 2018 it was an eventful quarter. Overall, the US dollar declined by 1.8 percent against a basket of international currencies, as trade wars and politics weighted heavily on the most traded global currency. The Mexican Peso turned in the strongest performance of any of the major currencies during the quarter as US President Trump’s continued calls for a border wall to be paid for by Mexico seemed to be going nowhere quickly. Some of the gains in the Peso can be attributed to bouncing back from the declines seen late last year in the Peso versus the dollar. The Venezuela Bolivar had a unique experience during the quarter as the currency fell more than 99.9 percent and yet it did not go out of existence. 99.6 percent of the move was done by the Venezuelan government itself as it revalued the currency, but did not even go far enough as the currency black market in Venezuela seems to be pointing to the need for another 99 percent devaluation before the true value is achieved. President Maduro has miraculously managed to hang on to power in Venezuela, but his time looks to be coming to an end as the economy in Venezuela is accelerating its spiraling out of control.

For those of you who follow and are interested in the style box performance of various investments throughout the quarter, below is the standard style box performance for the first quarter 2018:

 

Style / Market Cap Value Blend Growth
Large Cap -2.97% -0.75% 1.34%
Mid Cap -2.63% -0.48% 2.14%
Small Cap -2.75% -0.18% 2.23%

The results of the above style box is a little misleading as there were two very distinct markets during the first quarter; the bull run and then the volatility. Growth beat value by so much during the bull move higher to start the year that, despite the outsized decline seen in growth relative to value during the second half of the quarter, growth still managed to beat out value. Small caps in general performed better than their larger market segments as the small caps stocks were the least impacted by the trade war rhetoric during the quarter as most small cap companies primarily do business within the US. The movements of a relatively small number of stocks during the quarter dictated the style box performance more than normal this quarter; GE alone was enough to drive the Large cap value style box down to the worst performance of the group.

 

The following table gives the performances for the best sectors for the first quarter of 2018:

 

Sector Change
Software 9.80%
Medical Devices 6.64%
Multimedia Networking 6.41%
Semiconductors 6.24%
Aerospace & Defense 5.46%

 

Despite the stumble toward the finish line, the Software sector still turned in the strongest performance of any sector during the first quarter. Medical Devices came in second by largely staying out of the political spotlight as Pharmaceuticals bore the brunt of the political hits in the healthcare industry. Multimedia Networking and Semiconductors took the third and fourth spots in the top sector performance spots for the quarter as increasing demand for data at faster and faster speeds drove strong revenues and demand within the sectors. Semiconductor demand has been growing almost exponentially as mobile technology becomes more powerful and hardware intensive. Aerospace and Defense would have been the top performing sector for the quarter had it not been hit by the talks of a global trade war and the potential negative impacts of such on Boeing and its $1 trillion plane order from China.

 

The bottom-performing sectors for the first quarter of 2018 were as follows:

 

Sector Change
Consumer Goods -5.68%
Energy -6.05%
Natural Resources -6.19%
Telecommunications -7.41%
Home Construction -9.57%

 

With data throughout the quarter pointing toward a deceleration in growth of the US housing market it was not surprising to see that Home Construction was the worst performing sector during the first quarter. Within Home Construction, it was the building supply companies that drug down the sector overall with eight of the key building suppliers falling more than 20 percent during the quarter. Telecommunications ran into political uncertainty during the quarter and ended up declining nearly seven and a half percent. Natural Resources and Energy took the third and fourth from the bottom positions as tariffs on lumber uncertainty over the future of OPEC and US shale oil production stole most of the headlines related to the sector. Consumer Goods rounded out the bottom five sectors during the first quarter as the defensive sector underperformed significantly during the first half of the quarter and out performed during the second.

 

Commodities saw mixed results during the first quarter of 2018; returns were as follows:

 

Commodity Change
Goldman Commodity Index 2.27%
Gold 1.73%
Silver -3.63%
Copper -9.19%

 

Commodity Change
Oil 8.99%
Livestock -11.76%
Grains 8.00%
Agriculture 0.27%

 

Overall, the Goldman Sachs Commodity Index gained 2.27 percent during the first quarter, thanks to strong movement in the price of oil as well as soft commodities. Oil advanced 8.99 percent for the quarter with much of the rally occurring after the announcement of John Bolton coming into the Trump administration as a National Security adviser. His stance on Iran and the nuclear deal with the country looks to be at risk going forward, which could add a terrorism premium to the global price of oil. Gold rallied during the last three weeks of trading, managing to break back into positive territory for the quarter, while Silver came up slightly short. The inflation hedging aspect of gold combined with the flight to safety drove most of the movement. Silver tried to make a comeback at the end of the quarter, but fell short of turning positive as fewer investors utilize silver as a hedge against inflation or as a safety investment. The more industrially used Copper had a difficult quarter as trade wars adversely impacted the metal. Fears over output in China being slowed down added to the already oversupply of Copper inventory within China. Livestock was the largest decliner for the quarter in the commodities sector, falling more than 11 percent. Agriculture overall advanced by 0.27 percent with grains leading the way higher by 8 percent for the quarter. Wheat prices were watched closely during the quarter by commodity traders as the US planted the lowest volume of winter wheat in many years to deal with the nearly constant oversupply and resulting depressed price of wheat.

 

With the threat of rising interest rates being a major theme of the markets during the first quarter and the March rate hike at the FOMC meeting, it was not surprising to see that long dated bonds declined during the quarter:

Fixed Income Change
Long (20+ years) -3.51%
Middle (7-10 years) -1.94%
Short (less than 1 year) 0.30%
TIPS -0.88%

Bonds that mature in longer than 20 years declined by more than 3.5 percent during the quarter as yields were seen rising on any bonds longer than one year. The middle of the curve declined at a slower pace than the long end; this is typically what happens in a rising rate environment. Short term bonds advanced during the quarter, gaining on average 0.3 percent as their yield declined slightly as investors positioned to take advantage of rising rates over the short term. The Fed made it clear that it will be hiking rates at least two more times in 2018 and that rate hikes are likely to accelerate in 2019 and beyond as it fights to get back to a normal long-term rate. This decline in fixed income investments will likely continue if rates are on the rise and could last for several years to come.

For a PDF version of the below commentary please click here Weekly Letter 4-2-2018

Commentary quick take:

 

  • Major developments:
    • Markets rebounded last week
    • Volatile market swings becoming the norm
    • Slow week for meaningful developments

 

  • US:
    • Markets had a positive, yet wild week
    • Large cap technology drove volatility
    • Amazon has become a target of President Trump

 

  • Global:
    • All eyes on the US
    • Trade wars heating up

 

  • Hybrid investments strategy update:
    • Several changes
    • Models remain defensively positioned

 

  • This week for the markets:
    • The start of a new quarter
    • Political uncertainty

 

  • Interesting Fact: Nikkei’s amazing run

 

Major theme of the markets last week: Very volatile markets

The cartoon this week is recycled from late February, but it was so apropos I couldn’t resist using it once again. Following a decline of more than 5 percent on each of the three major averages two weeks ago, the US markets last week started out with a vengeance, gaining more than 2.7 percent on Monday and experiencing their strongest daily gains in several years. This turned out to be a classic dead cat bounce, however, as Tuesday’s trading session saw the three major US indexes fall at least three quarters of what they had gained on Monday. Wednesday was a muted trading day with small losses seen on all three of the major indexes, which set the market up to enter rally mode on Thursday (the last trading day of the week). The yo-yo effect was in full force as we closed out the first quarter of 2018. While the NASDAQ managed to stay positive for the quarter, the S&P and the Dow both broke their quarterly winning streaks by posting a decline for the quarter. Both the S&P 500 and the Dow had not posted a negative quarter since the third quarter of 2015 when each index was down more than 6 percent. Looking back at the time series of historical quarterly data for all three of the major US indexes, it is rare to have just one random quarter of negative performance. It is far more common to experience several negative quarters of performance near each other, a theory that is known as clustering. Looking at the Dow back to 2002, there have been only two times out of the fifteen occurrences that the Dow has not seen a second negative quarter within the next three following a negative quarter. With that in mind and with all of the political uncertainty on so many fronts, it appears we are likely in for a prolonged time of excessive volatility and market uncertainty.

 


US news impacting the financial markets:

 

Large cap technology companies stole most of the financial related news during the shortened trading week last week as trouble seems to be coming from all directions for the group. Several weeks ago, news broke that Facebook had seen its user data manipulated by third party companies such as Cambridge Analytica to impact the 2016 US election. Improper use of consumer Facebook data is a very big deal since Facebook and other large social media technology companies know so much information about each individual user. Last week, the Federal Trade Commission (FTC) announced it was opening an investigation into the data breach and misuse of consumer data without their permission or knowledge. The situation brings to light a much more troubling aspect of companies having so much data on individual users. Can consumer data be used and to what extent without the user’s knowledge? Facebook, so far, has said it was third party companies that manipulated the data Facebook sold them, but that does not look like it will hold up under further inquiry. Facebook CEO Mark Zuckerberg is scheduled to testify before Congress in two weeks in what will be a very closely watched and likely heated debate between members of Congress and himself. He recently declined an invitation to come before members of Parliament in the UK, saying he was not the best suited to discuss the happenings of Facebook and Cambridge Analytica. Facebook has dropped almost 14 percent since news broke of the data being misused and the decline includes a gain of more than 4.4 percent on Friday last week.

 

Facebook is not the only large technology company that is currently in hot water. Tesla stock is down more than 25 percent since the end of February as delays continue in the production of the Model 3. There are also renewed questions as to the safety of the company’s auto pilot function on it vehicles after a highway crash in California killed a young driver who did not have his hands on the wheel while using auto pilot mode. Adding to the company’s woes last week was the announcement of a recall of all original Model S cars for a replacement of potentially faulty steering bolts. Tesla has long been burning through money as it tries to ramp up production of vehicles, while building a gigafactory for making batteries and incorporating Solar City into its business. The company now looks to be in the middle of a cash crunch, which has lead to some analysts putting out downgrades on the company over fears of Tesla not being able to continue to finance operations at favorable interest rates.

 

Amazon was thrown in to the mix of large cap technology companies that took a hit recently as President Trump took to Twitter to attack the company last week. Following President Trump’s tweets, the stock declined by 8 percent over just two days last week. President Trump went after Amazon for what he calls unfair business practices and taking advantage of the low shipping costs provided to the company by the US postal system. He openly wondered if the company was paying its fair share of federal and state taxes and has asked that the situation be investigated by the government. Amazon has operated in the grey area of tax collection for products sold on its website, with the company often choosing to collect less taxes than competitors, thus giving Amazon a price advantage, especially on higher dollar purchases. President Trump knows the US government is currently spending more than it is taking in and is looking for ways to increase the revenues to the government; going after taxes on online sales looks like an easy target for him to potentially add billions of dollars in tax revenues. President Trump also does not pass up opportunities to hit back at people who are critical of his administration, something Amazon founder Jeff Bezos is known for, both in his business with Amazon and through his ownership of the Washington Post, commonly referred to as a “fake news” organization by the President.

 

With large cap technology companies making up more than 13 percent of the total weighting of the S&P 500, 10 percent of the Dow and more than 45 percent of the NASDAQ, it is easy to see how a rough time for large technology leads very quickly to a rough time for the overall US indexes. These are the same stocks that had been the high fliers through much of the recent bull markets, driving a significant percentage of the overall markets movements. If volatility and unwelcome news continues to come out from large technology companies, volatility in the overall markets is likely to increase.

 

Global news impacting the markets:

 

Last week was a quiet week for the global stock markets as it was a shortened week around the world for most indexes. Technology declines in the US, as mentioned above, had knock-on effects on Asian technology parts suppliers as they were pushed lower by uncertain future demand. Trade wars between the US and China also made some headlines, as the world waits to see if China retaliates against the tariffs the US imposed over the past month. In the end, the tariffs will likely only hurt the consumers of products that fall under the new tariffs as most companies will pass along the price increases to the end users, provided the products being sold have inelastic supply and demand curves. This coming week, there are two central bank meetings to start off the month of April, but both are not expected to make any changes to their rate policies.

 

Hybrid model performance and update

For the shortened trading week ending on 3/29/2018, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2018 YTD Since 6/30/2015

(Annualized)

Aggressive Model 1.51% -1.76% 5.63%
Aggressive Benchmark 1.10% -1.28% 6.09%
Growth Model 1.14% -1.13% 4.97%
Growth Benchmark 0.86% -0.90% 4.92%
Moderate Model 0.76% -0.74% 3.98%
Moderate Benchmark 0.62% -0.53% 3.72%
Income Model 0.61% -0.95% 3.44%
Income Benchmark 0.32% -0.11% 2.15%
Quant Model 2.95% -7.47%
S&P 500 2.03% -1.22% 9.14%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were a few changes to the hybrid models over the course of the past week with all of them being defensive in nature. On Monday, with the Dow rallied by more than 600 points, the hybrid models moved more defensive by selling part of the remaning positions in financials; both Rydex Financials (RYKIX) and Profunds Banking (BKPIX). The second change last week for the hybrid models also occurred on Monday, adding to the hedging position on the inverse S&P 500 fund DXSSX. Looking at the movement of the VIX intraday on Monday last week, it did not signal that the rally would be able to continue as volume was just not behind such a significant move higher. With the weak rally in place on Monday, it presented a good day to add defensive hedging positioning, which is now up to about two thirds of a full hedging position across all the hybrid models. The final move of the week last week was to sell half of the position in the Rydex equal weighted technology ETF (RYT). This trade was also done on Monday when the market was rallying. Currently, the hybrid models are defensively positioned as volatility looks to continue in earnest over the next several weeks.

 

Market Statistics:

 

Index Change Volume
Dow 2.42% Above Average
S&P 500 2.03% Average
NASDAQ 1.01% Average

 

After falling more than 5 percent across the board two weeks ago, last week was a rebound week for the US markets as they recovered some of their losses. Volume on the three major indexes (after adjusting for a four-day trading week) was average on both the NASDAQ and the S&P 500, and slightly above average on the Dow. The strong market rally to start the week was followed by heavy declines and a late day rally on Friday that managed to pull the market positive for the week.

 

The following were the top 5 and bottom 5 performing sectors over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Real Estate 4.20%   Technology 0.88%
Utilities 3.79%   Software 0.80%
Consumer Staples 3.58%   Multimedia Networking -0.02%
Consumer Goods 3.02%   Semiconductors -0.30%
Broker Dealers 2.96%   Commodities -0.42%

 

Historically defensive sectors led the way last week as investors seemed to be lightening up on risk assets and investing in the traditionally less risky sectors. Real Estate took top honors, gaining more than four percent, while Utilities came in second with Consumer Staples and Consumer Goods coming in third and fourth. The only sector to make the top five sectors that was not a classic risk-off sector was financial Broker Dealers, which took the fifth spot, mostly due to a rebound trade after the sector fell by more than 7.3 percent two weeks ago. Among the bottom five performing sectors last week, we find all classic risk-on sectors of the markets. Commodities took bottom honors last week, falling 0.4 percent as oil moved lower for the first week in several weeks. Technology related sectors took the remaining four bottom spots as large cap technology took a hit from the attack by President Trump on Amazon and the ongoing troubles for electric car manufacturer Tesla. The large cap technology trade, which for a long time drove the overall market performance higher, appears to now be one of the primary drivers pushing market volatility.

 

US fixed income markets all increased last week, pushing yields lower across the board, as a flight to safety was seen across the financial markets, despite equity markets posting modest gains for the week. Trade wars continued to be the primary driving force behind the market movements of the last week.

 

Fixed Income Change
Long (20+ years) 1.44%
Middle (7-10 years) 0.48%
Short (less than 1 year) 0.05%
TIPS 0.42%

 

Best and Worst Currencies Change
US Dollar 0.81%
South Korea won 1.96%
Venezuela bolivar -11.46%

 

 

The US dollar had a positive week last week, gaining 0.8 percent against a basket of international currencies. The best performing currency last week was found in South Korea and was the won, which gained 1.96 percent, as the situation with North Korea seems to be taking steps toward a non-confrontational ending. Also last week, South Korea and the US announced a trade deal between the two countries, which provided a boost to the South Korean won as well. The worst performing currency last week globally was found in Venezuela for the second week in a row as the bolivar declined by 11.46 percent, as political uncertainty and hyperinflation continues to roil the economy and financial system in Venezuela. It seems like only a matter of time before the bolivar is removed from the international currency trading markets and it is no longer followed by the data reporting companies.

 

Commodities were mixed over the course of the previous week as oil and precious metals moved lower:

Metals Change   Commodity Change
Gold -1.43%   GS Commodity Index -0.42%
Silver -1.09%   Oil -1.43%
Copper 1.79%   Livestock -1.32%
      Grains 1.31%
      Agriculture -0.32%

 

The GS Commodity index posted a decline of 0.42 percent last week, as declines in oil and precious metals helped drive the overall index movement. Oil fell 1.43 percent as fears over war in the Middle East abated slightly as cooler heads look likely to prevail in the Iranian nuclear situation. Gold and Silver posted losses last week, declining by 1.43 and 1.09 percent, respectively. The more industrially used Copper bucked the trend and posted a gain of 1.79 percent. Soft commodities were mixed last week as Livestock declined 1.32 percent, while Agriculture overall decreased by 0.32 percent and Grains posted a gain of 1.31 percent.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Nikkei 225 Japan 2.63%   S & P/NZX 50 New Zealand -2.31%
IBEX 35 Spain 2.21%   Tel Aviv Israel -2.33%

Last week was a positive week for the global financial markets with 72 percent of the major indexes posting gains for the week. Japan’s Nikkei 225 Composite index posted the largest gain last week of any of the global indexes, advancing 2.63 percent. So far, Japan has managed to stay mostly out of the trade wars headlines as the Japanese economy is one of the most at risk economies if a global trade war erupts. Israel’s Tel Aviv index posted the largest decline globally last week, declining by 2.33 percent, as fighting has once again erupted in Gaza.

The see-saw movements of the VIX continued last week as the VIX declined by 19.7 percent following a gain of 57 percent two weeks ago. It appears the VIX will continue bouncing around over the next few weeks as the financial markets attempt to make sense of what will occur next on a wide variety of fronts that impact the financial markets. We obviously remain in a time of heightened overall volatility that started back in late January, as the volatility of volatility remains elevated. With the current VIX reading of 19.97, a move of 5.76 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week was a slow shortened week for economic news releases with the primary focus of the releases being the third estimate of GDP. There were no releases that meaningfully beat or fell short of market expectations.

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Negative 3/27/2018 Consumer Confidence March 2017 127.70 129.50
Neutral 3/28/2018 GDP – Third Estimate Q4 2017 2.90% 2.60%
Neutral 3/28/2018 Pending Home Sales February 2018 3.10% 2.50%
Neutral 3/29/2018 Personal Income February 2018 0.40% 0.40%
Neutral 3/29/2018 Personal Spending February 2018 0.20% 0.20%
Neutral 3/29/2018 PCE Prices February 2018 0.20% 0.20%
Neutral 3/29/2018 PCE Prices – Core February 2018 0.20% 0.20%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week, the economic news releases started on Tuesday with the release of the latest Consumer Confidence figure (March reading) as measured by the US government. The release came in slightly below market expectations, but remains very elevated given all the political uncertainty in the US economy. On Wednesday, the third estimate for fourth quarter GDP here in the US was released and came in above expectations, posting a reading of 2.9 percent, while the market had been expecting 2.6 percent growth. The release had minimal impact on the overall markets on Wednesday as the reading was not significantly better than the market was expecting. On Thursday (last business day of the week), personal income and spending as well as PCE prices were released, with all four readings coming in exactly in line with market expectations and causing no market reaction as many investment professionals cut their days short heading into the extended weekend.

 

This week is a relatively slow week for economic news releases, with the focus of the week being on the US labor market. Releases that have the most potential to impact the overall markets this week are highlighted in green:

 

Date Release Release Range Market Expectation
4/2/2018 ISM Index March 2018 60.0
4/4/2018 ISM Services March 2018 59.0
4/6/2018 Nonfarm Payrolls March 2018 175K
4/6/2018 Nonfarm Private Payrolls March 2018 180K
4/6/2018 Unemployment Rate March 2018 4.00%
4/6/2018 Avg. Hourly Earnings March 2018 0.20%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week the economic news releases start on Monday with the release of the ISM index for the month of March, which is expected to show a very slight slowing in manufacturing acceleration for the month. On Wednesday, the services side of the ISM index is set to be released with expectations that it too will post a slight slowdown in acceleration during the month of March. The markets will likely look at these two releases in tandem and react only if both releases are significantly better or worse than expected. Friday is a busy day for economic news releases as all the standard employment related data for the month of March is released by the government. After stellar payroll data for the month of February, March payroll figures have elevated expectations and could see the actual figures come up short. The overall unemployment rate is expected to have decreased by one tenth of a percent down to 4 percent from 4.1 percent. The markets will also be paying close attention to the average hourly earnings reported on Friday as they have been consistently moving higher over the past five months, which is starting to point toward inflation. There are three speeches being given by Fed officials this week. With a general lack of other catalysts, the markets may pay closer than normal attention to these speeches, grasping for any additional information.

 

 

Interesting Fact —So many positive days

 

According to a note released by Goldman Sachs, the Nikkei 225 index has seen a positive return on the first day of trading for each month going all the way back to July of 2016. This is a very impressive track record given all the choppiness that has occurred within Japanese equity over the same time. Sadly, however, the streak came to an end earlier today as the Nikkei posted a decline of 0.3 percent for the first day of trading in April 2018.

 

Source: Bloomberg.com and Goldman Sachs

For a PDF version of the below commentary please click here Weekly Letter 3-26-2018

Commentary quick take:

 

  • Major developments:
    • Trade wars and politics rattled the markets
    • Fed raised rates in the US
    • Tech tumble

 

  • US:
    • Markets had a difficult week
    • March FOMC meeting
    • Revolving door at White House keeps turning
    • VIX spike
    • Spending bill passed in Congress

 

  • Global:
    • Trade wars have begun
    • Bank of England meeting
    • Reserve Bank of New Zealand meeting

 

  • Hybrid investments strategy update:
    • Several changes
    • More defensively positioned
    • Cash remains elevated

 

  • This week for the markets:
    • Political uncertainty
    • Trade wars could intensify

 

  • Interesting Fact: Soy in everything!

 

Major theme of the markets last week:  Emotional investing roller coaster

Last week was a wild week for news and actions that impacted the markets. In the US, the March FOMC meeting would normally have been the focal point of the financial markets. Last week, however, it came in third. Trade wars contributed to an emotionally charged week for the equity markets. In politics, concerns over the rapid turnover of administration officials in Washington DC and the passage of a spending bill by Congress also made headlines. Following his recently enacted tariffs on steel and aluminum imports, US President Trump last week announced more tariffs directly aimed at China and requested that members of his staff investigate ways to protect the US intellectual property potentially being taken by Chinese companies. China announced last week that it would be imposing tariffs on soybeans coming from the US (the US exports substantial amounts of soybeans every year to China) and other retaliatory measures on trade. While many academics have pointed out the challenges of winning a trade war, with many saying there are no winners, President Trump continues to push for reciprocal trade deals. As of this writing, there has only been one reciprocal trade deal announced and that is between the US and South Korea. Perhaps other deals are in the works, but it seems most countries are waiting to see just how far the US administration is willing to go with trade wars before beginning to negotiate individual country trade deals. In light of the trade wars, the fear gauge (VIX) here in the US spiked higher by nearly 60 percent as investors suddenly became fearful that the slow global growth that we have seen the past few years is at risk of stalling and potentially turning negative if protectionist trade policies come into full effect.

US news impacting the financial markets:

 

Here in the US, the financial markets experienced a wild week that was highlighted by Fed Chair Powell’s first FOMC meeting as chairman. The FOMC raised rates here in the US by 0.25 percent, as was widely anticipated and fully priced into the US markets. There was little reaction to the rate increase itself; the reaction in the financial markets came from the data released at the end of the Fed meeting, which included the Fed’s Dot Plot. The Fed’s dot plot is a dot plot on which each Fed official has a single dot for where they think rates will be for each of the various times being considered (end of year rate level). The filled in green circles below are the new dots, while the unfilled circles represent the projections from the end of December 2017.

As can be seen in the above chart, the expectation for 2018 is only three rate hikes, with the rate hike frequency accelerating in 2019 and 2020. The realization of only three hikes in 2018 hit the financial sector hard as many investors had been hoping Chair Powell would announce the increased likelihood of four rate hikes during 2018, based on the dot plots. With inflation largely still in check and the US labor market remaining stable, there is just not enough justification for raising rates faster than was previously planned.

On the political front last week, there were several items that made headlines and had a notable impact on the overall markets. President Trump saw his lead attorney in the Muller investigation quit after saying his advice was being ignored. We also saw National Security Advisor HR McMaster replaced by John Bolton and President Trump’s threat to veto the spending bill on Friday. The markets reacted badly to each of the above-mentioned actions, but the largest impact was seen on the John Bolton announcement as Mr. Bolton is seen in many circles are a hardliner when it comes to dealing with North Korea and Iran. In the past, he has advocated for bombing both countries rather than talking with them. On the announcement of his appointment, Aerospace and Defense companies all saw their stock prices jump higher, while oil prices around the world also increased over fears of escalating tensions between the US and Iran. Late during the trading week last week, President Trump made headlines yet again, this time as he threatened to veto the spending bill that Congress had passed just hours before a potential government shutdown. The spending bill, which runs more than 2,000 pages and funds the US government through the end of October 2018, is a classic government spending bill that provides funding for may pet projects of individual members of Congress, along with funding our military spending. With the threat of the bill being vetoed, purportedly because it did not include funding for a border wall or for DACA, the US financial markets all fell sharply, only to incrementally recover shortly after President Trump signed the spending bill.

 

Global news impacting the markets:

 

The potential for a trade war was the primary topic of the global financial news last week as the previously announced steel and aluminum tariffs went into effect on March 23rd. However, the tariffs were enacted with the following countries getting temporary exemptions: South Korea, the European Union, Argentina, Australia, Brazil, Canada and Mexico. As mentioned last week, having exemptions in place for certain countries dilutes the effectiveness of a tariff because the large exporting countries not exempted will find ways around them by using countries included in the exemptions list. Following the tariffs going into place officially, China announced it would be imposing tariffs on $3 billion of imported goods from the US and would be coming up with a larger list of items to tax if tariffs keep being put into place by the US. In addition to global concerns about trade wars, the global financial media focused on central banks as the US Fed, Bank of England (BoE) and the Reserve Bank of New Zealand all held rate setting meetings. As mentioned above, the US Fed raised rates, as was widely expected. The BoE as well as the Reserve Bank of New Zealand both opted to not adjust rates at their March meetings. However, there was some dissent among members of the BoE with several members calling for immediate rate hikes and wanting the forward-looking statement from the bank to be changed. In the end, the forward-looking statement remained unchanged, saying any future increases in rates would be “at a gradual pace and to a limited extent.” The Reserve Bank of New Zealand kept its guidance the same as well, saying its monetary policies would remain accommodative for a “considerable period of time.”

 

Hybrid model performance and update

For the trading week ending on 3/23/2018, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2018 YTD Since 6/30/2015

(Annualized)

Aggressive Model -3.47% -3.24% 5.08%
Aggressive Benchmark -3.98% -2.35% 5.70%
Growth Model -2.54% -2.28% 4.56%
Growth Benchmark -3.10% -1.74% 4.62%
Moderate Model -1.71% -1.51% 3.72%
Moderate Benchmark -2.21% -1.15% 3.50%
Income Model -1.46% -1.56% 3.23%
Income Benchmark -1.10% -0.43% 2.04%
Quant Model -3.73% -10.15%
S&P 500 -5.95% -3.19% 8.66%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were several changes to the hybrid models over the course of the previous week. Following the news of Cambridge Analytica’s misuse of Facebook data and the seemingly scripted “apology” from CEO Mark Zuckerberg, the Internet Technology sector looked ripe for political oversight. Many users have liked the absence of political oversight, but this Facebook problem could be a game changer for the sector. Considering this development, the Profunds Internet fund (INPIX) was sold last week as the downside looks far larger than any continued upside gains. A second adjustment last week was the sale of half the position of financials (BKPIX and RYKIX), which had been moving higher very quickly, but following the March FOMC meeting looked like they could slow down meaningfully. The final change last week was to increase the amount of hedging position held in each of the hybrid models using the Direxion Funds S&P 500 bear fund (DXSSX). This fund is designed to go up when the markets decline and is used as a kind of counterweight to the risk being taken in the overall models on the long side. Overall, last week the movements made in the models lowered the overall markets risk being taken.

 

Market Statistics:

 

Index Change Volume
Dow -5.67% Average
S&P 500 -5.95% Average
NASDAQ -6.54% Average

 

Last week was a difficult week for the US markets as all three of the major US indexes posted their worst weekly declines since the first week of 2016. Technology led the way lower as Facebook was wrapped up in a scandal of insufficiently protecting user data and potentially having its data used by manipulators during the 2016 election. With technology having been the high-flying area of the markets for the past few quarters, it was not surprising to see that the group was the hardest hit during the recent decline. When looking at volume, we saw levels that were inline with the average weekly volume that we have been seeing over the past year on all three of the major indexes. While the volume may have just been average, it seemed higher because it was higher than the abnormally low volume we have seen over the past month.

 

The following were the top 5 and bottom 5 performing sectors over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Commodities 2.33%   Semiconductors -6.81%
Oil & Gas Exploration 1.50%   Broker Dealers -7.38%
Energy -0.71%   Financial Services -7.45%
Natural Resources -0.95%   Technology -7.86%
Aerospace & Defense -1.52%   Regional Banks -7.93%

 

Commodities had a good week on a relative basis as oil and the precious metals all posted gains, helping drive the positive performance seen in the commodity sector as well as the Oil and Gas Exploration sector. Energy overall, while helped by rising oil prices, sank slightly last week, but turned in the third best sector performance. Natural Resources came in fourth with a decline of just under 1 percent. Aerospace and Defense was the only non-natural resource sector to make the top five performing sectors, thanks to the naming of John Bolton to the position of Secretary of State replacing the ousted Rex Tillerson. On the negative side, Financials and Technology took all five of the spots with Regional Banking leading the way down. Financials (Regional Banks, Financial Services, Broker Dealers) took a leg down last week after the FOMC meeting concluded that three hikes were probably the most likely course of action for 2018. Technology landed in the second spot from the bottom last week as Facebook had its worst week in almost a decade after it was revealed that it mishandled personal information. Semiconductors rounded out the bottom five performing sectors last week as fears of the small electronic parts getting caught up in a trade war seemed to drag down all the major semiconductor manufactures.

 

US fixed income markets all increased last week, pushing yields lower across the board, as a flight to safety was seen across most of the financial markets. The primary driver of the bond market performance last week was the weakness being seen in the equity markets surrounding the fears of a potential trade war.

 

Fixed Income Change
Long (20+ years) 0.30%
Middle (7-10 years) 0.32%
Short (less than 1 year) 0.04%
TIPS 0.35%

 

Best and Worst Currencies Change
US Dollar -0.85%
South Africa rand 2.04%
Venezuela bolivar -16.56%

 

 

The US dollar had a negative week last week as investors feared that a trade war could hurt global demand for US dollars. The best performing currency last week was found in South Africa and was the rand, which gained 2.04 percent. Much of the gain seen in the rand last week came from several brokerage house upgrades of the country now that the handoff of the Presidency has been completed. The worst performing currency last week globally was found in Venezuela as the Bolivar declined by 16.56 percent, as political uncertainty and hyperinflation continues to roil the economy and financial system in Venezuela.

 

Commodities were mixed over the course of the previous week as oil and precious metals moved higher, while many of the other commodities pushed lower:

Metals Change   Commodity Change
Gold 2.42%   GS Commodity Index 2.33%
Silver 1.23%   Oil 5.82%
Copper -4.59%   Livestock -6.15%
      Grains -2.22%
      Agriculture -1.67%

 

The GS Commodity index posted a gain of 2.33 percent last week, as gains in oil and precious metals helped drive the overall index higher. Oil gained 5.82 percent as fears over war in the Middle East increased thanks to John Bolton’s seeming willingness to start fights in the region. Gold and Silver posted gains last week, advancing by 2.42 and 1.23 percent, respectively. The more industrially used Copper posted a decline of 4.59 percent over trade war fears. Soft commodities were down last week as Livestock declined 6.15 percent, while Agriculture overall decreased by 1.67 percent and Grains posted a loss of 2.22 percent.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Kuala Lumpur Composite Malaysia 1.02%   Nikkei 225 Japan -4.88%
RTS Index Russia 0.57%   BUX Hungary -5.02%

Last week was a very negative week for the global financial markets as only 3 (6 percent) indexes posted gains for the week. Malaysia’s Kuala Lumpur Composite index posted the largest gain last week of any of the global indexes, advancing 1.02 percent. This is not the first time that we have seen Malaysia disconnected from the rest of the financial world as the country relies less than many others on global trade. Aside from the losses in the US, which were all larger than the losses in Hungary, the Hungarian BUX index posted the largest decline globally, giving up 5.02 percent.

After a one week respite, the VIX was right back to very volatile times last week as the fear gauge increased by more than 57 percent as the equity indexes tumbled. The increase last week was the second latest weekly move that we have seen on the VIX so far in 2018 with the largest still being the second week of February when the VIX spiked 67 percent. As is typically the case following a spike in the VIX, there is a period that we see heightened volatility as investors take a much closer look at what they own and decide if they still like their holdings in a new highly volatile environment. With the current VIX reading of 24.87, it implies that a move of 9.31 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week was a full week for economic news releases with the primary focus of the releases being the FOMC’s March meeting. There were two releases that meaningfully beat market expectations (highlighted in green below) and none that significantly missed market expectations.

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/21/2018 Existing Home Sales February 2018 5.54M 5.42M
Neutral 3/21/2018 FOMC Rate Decision March 2018 1.63% 1.63%
Positive 3/23/2018 Durable Orders February 2018 3.10% 1.50%
Positive 3/23/2018 Durable Goods –ex transportation February 2018 1.20% 0.60%
Neutral 3/23/2018 New Home Sales February 2018 618K 620K

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week the economic news releases started on Wednesday with the release of the existing home sales figure for the month of February, which came in slightly above expectations, but was completely ignored by the markets in favor of the Fed’s March meeting, which concluded mid-day on Wednesday. The FOMC meeting was the first FOMC meeting with a press conference and an expected rate hike for new Fed Chair Jerome Powell. As discussed above, the FOMC did raise rates and Chair Powell did very well at not tipping his hand to much during the question and answer period of the press conference that followed the meeting on Friday last week. The February durable goods orders figures were released with orders both including and excluding transportation posting nearly double the expected growth rates. Wrapping up the economic news releases last week was the release of the February new home sales figure, which came in very close to market expectations and had no noticeable impact on the overall markets.

 

This week is a moderately busy week for economic news releases, with the third estimate of GDP being the most closely watched release. Releases that have the most potential to impact the overall markets this week are highlighted in green:

 

Date Release Release Range Market Expectation
3/27/2018 Consumer Confidence March 2017 129.50
3/28/2018 GDP – Third Estimate Q4 2017 2.60%
3/28/2018 Pending Home Sales February 2018 2.50%
3/29/2018 Personal Income February 2018 0.40%
3/29/2018 Personal Spending February 2018 0.20%
3/29/2018 PCE Prices February 2018 0.20%
3/29/2018 PCE Prices – Core February 2018 0.20%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week the economic news releases start on Tuesday with the release of the latest Consumer Confidence figure (March reading) as measured by the US government, with expectations that the figure will have changed very little since the end of February reading. If we see a downward deviation from this expected reading it could show that the stock market volatility is starting to adversely impact the overall consumer confidence in the US. On Wednesday, the third estimate for fourth quarter GDP here in the US is set to be released with expectations that the second estimate of 2.5 percent growth will be revised higher to 2.6 percent growth. This release should have limited impact on the markets if it comes in close to expectations. On Thursday (last business day of the week) personal income and spending as well as PCE prices will be released. Personal income and spending are anticipated to have increased slightly during February, while price inflation is expected to remain subdued. In addition to the above scheduled economic news releases, there will be speeches made by 6 different Fed officials this week as the Fed outlines and potentially elaborates on its decision to raise rates last week at the March FOMC meeting and what it could mean for future FOMC meetings.

 

Interesting Fact — Soy in everything!

 

One acre of soybeans can make 82,368 crayons.

Soy-based products can include: wood stains, concrete stains, caulking, paint, insulation, foam, candles, beauty supply products and much more!

More than 90 percent of America’s daily newspapers use soy ink.

Biodiesel is a clean burning fuel produced from U.S renewable resources, including soybeans.

Soy is the leading U.S. agricultural export, valued at more than $23 billion.

 

Source: soystats.com

For a PDF version of the below commentary please click here Weekly Letter 3-19-2018

Commentary quick take:

 

  • Major developments:
    • Markets moved lower for the week
    • Consumer sentiment highest since April 2004
    • Four rate hikes could be in the cards

 

  • US:
    • Markets moved lower
    • PA special election upset
    • Rex Tillerson is out

 

  • Global:
    • Trade war talk continues
    • Brexit deadline extended 21 months
    • Putin won the election

 

  • Hybrid investments strategy update:
    • No changes over the course of the past week

 

  • This week for the markets:
    • Political uncertainty
    • FOMC March meeting
    • Dot Plot and expectations from Fed

 

  • Interesting Fact: Geoffrey the Giraffe

 

Major theme of the markets last week:  Long time since Fed hawks have been let out

The major theme of the US markets last week was inflation data released during the week and speculation about how the Fed would view the data going into this week’s FOMC meeting. There were several different inflation indicators released last week with import prices being the primary driver of increasing inflation, due almost entirely to the weakness seen in the US dollar. As the US dollar declines against foreign currencies, the price of imports increases and is inflationary to the overall US economy. Additionally, last week we saw consumer sentiment increase to the highest level since 2004; this is also historically a precursor to inflation. On the flip side last week, both the consumer price index (CPI) and the producer price index (PPI) came in at expectations, which were for very low readings of inflation. The question now becomes whether the hawkish inflationary data last week outweigh the more subdued inflation data and whether Jerome Powell will steer the FOMC toward picking up the pace of rate hikes during 2018. Currently, the odds of a rate hike at the meeting this week are about as certain as they can be, running with a higher than 95 percent chance of a hike. Fixed income markets have already priced in the move, but have yet to fully price in four rate hikes in 2018, which looks like it could be on the table.


US news impacting the financial markets:

 

Aside from speculation about the upcoming FOMC meeting and the potential for four rate hikes this year, the US financial media once again focused on the White House and was fearful of what may start to occur with global trade. On Tuesday last week, President Trump announced that Secretary of State Rex Tillerson was being replaced by CIA director Mike Pompeo. After top economic adviser Gary Cohn was let go two weeks ago, it became clear that a further shuffling of staff in the White House was highly possible. All of the changes greatly increase the risk of a “Presidency of one” starting to form, in which no one is left in the administration other than advisers who only say “Yes” to all of President Trump’s ideas. Rex Tillerson being released is concerning to the markets because he was a well-known advocate of free trade and, much like Gary Cohn, was against President Trump’s tariffs put in place on steel and aluminum. Being the former CEO of Exxon, Rex Tillerson also had many personal relationships with business and global leaders around the world, something Pompeo lacks that could leave him in a precarious spot as he learns the ropes of international diplomacy. When news broke that Chief of Staff John Kelly was on the outside looking in, the markets feared that yet another independent thinking high ranking staff member of the White House could be on their way out. Toward the end of the trading week last week, there was also increasing speculation that President Trump may attempt to shut down special investigator Robert Muller’s investigation as Muller last week subpoenaed many corporate financial records from the Trump administration, a “red line” in the past for President Trump. Over the weekend, President Trump took to Twitter more than normal, lashing out at Special Council Muller, enough so that Republicans in Congress warned it would be the beginning of the end should Trump have Muller fired. Politics that did not directly involve President Trump also made a few headlines last week with a special election being held in Pennsylvania.

 

On Tuesday last week, there was a special election in Pennsylvania’s 18th Congressional district after Republican Tim Murphy was forced to resign late last year due to an affair. The 18th district was a district that President Trump carried by 20 percent in the election in 2016 and was seen as a good test for what could happen during the upcoming mid-term elections in November. Democrat Conor Lamb beat out Republican Rick Saccone by a very narrow margin (the GOP is contesting the results in court) despite the Republican party pushing $10 million into the normally small-time district and having several high-profile people speak at campaign rallies. In the end, this election will have little impact on anything as the district is being absorbed by a larger district in the upcoming midterm election, but the results still have Republicans concerned about their future in November. The financial markets took the results in stride and did not react as one would expect if a significant number of investors changed their mind about who would control the House in Congress following the mid-term elections. Democrats still need to pick up 27 seats to take control, which is a very tall order, but after the results in PA, it seems slightly more manageable. Republicans running in November must now start to decide if they will align with President Trump or distance themselves in hopes of securing their seat once again. If the Democrats manage to take the House in November, it would probably be neutral for the financial markets as we would then have a divided government with very little able to be done as both sides would have to agree on legislation to get anything passed. Democratic control of the House would also potentially speed up any potential impeachment processes against President Trump, an action that could have an adverse impact on the US financial markets.

 

Global news impacting the markets:

 

Trade wars and politics took most of the international financial headlines last week. US President Trump late in the week asked for a new round of potential tariffs against China, specifically, to be drawn up. So far, China has held back on its reactions to the Steel and Aluminum tariffs as the loop holes opened by Canada and Mexico getting exemptions is enough for China to work within the rules and still push its products to the US. However, if the administration specifically targets China with another set of tariffs, retaliatory measures will have to be taken by China. President Xi Jinping is now securely placed in the leadership role for China for the rest of his life and can afford, more so than President Trump, to play dirty with a trade war in the short term to secure a longer-term victory. As discussed below, Boeing appears to potentially be a pawn in the trade war with the stock already sliding almost 10 percent since the trade war rhetoric was increased. The international news was not all negative last week, however, as there was a breakthrough in Brexit negotiations over the past weekend.

 

An announcement was made late on Sunday that negotiators had agreed to extend the Brexit deadline by 21 months from March of 2019 until December of 2020 to smooth the transition of the UK out of the EU. The agreement, which is not fully completed, has items that both sides like and dislike, with the main sticking point being that if an agreement cannot be made between the UK and Northern Ireland by the new deadline, Northern Ireland would automatically stay within the EU, effectively being forcefully broken from the UK. One of the big developments of the deal reached is that, during the transition period, the UK will be allowed to negotiate a new trade deal with the EU. This had been a sticking point for the EU in the past as they did not want any trade negotiations to occur until after the Brexit date. Both sides acknowledged that while this draft was complete, they are still a long way from the finish line and that the momentum of the last few weeks of negotiations should be carried on if it lasts. Global market futures reacted positively to the announcement over the weekend as Brexit has remained one of the great uncertainties of the past several quarters and any resolution to the situation should be embraced by the markets.

 

Russia also made a few headlines last week as President Putin easily won the Presidential election that was held over the past weekend, winning 76 percent of the popular vote, though voter turnout remained below what he would have liked at only 67 percent of eligible voters. The results were a positive for the Russian government, which is currently embattled with the UK over the poisoning of a former spy and his daughter and the US investigation into collusion between President Trump and Russia during the election.

 

Hybrid model performance and update

For the trading week ending on 3/16/2018, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2018 YTD Since 6/30/2015

(Annualized)

Aggressive Model -0.87% 0.25% 6.51%
Aggressive Benchmark -0.50% 1.70% 7.34%
Growth Model -0.50% 0.27% 5.60%
Growth Benchmark -0.39% 1.40% 5.88%
Moderate Model -0.19% 0.21% 4.41%
Moderate Benchmark -0.27% 1.09% 4.39%
Income Model -0.02% -0.10% 3.82%
Income Benchmark -0.12% 0.68% 2.47%
Quant Model -0.53% -6.65%
S&P 500 -1.24% 2.93% 11.22%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were no changes to the hybrid models over the course of the previous week. Cash levels remain elevated across all the hybrid models as partial positions are being picked up on dips in the markets.

 

Market Statistics:

 

Index Change Volume
NASDAQ -1.04% Below Average
S&P 500 -1.24% Below Average
Dow -1.54% Average

 

All three of the major US indexes declined for the week last week with the Dow leading the way lower. During a downward moving week, it is unusual to have the Dow decline the most and the NASDAQ decline the least, but the performance of the Dow was driven primarily by one component stock declining—Boeing. Boeing last week declined by almost 7 percent as fears over a trade war between the US and China put China’s massive airplane order from Boeing in the cross hairs. Last year, Boeing took orders worth $26 billion over the next few years from Chinese airlines. However, the airlines also indicated that they would like to purchase more than 7,000 planes over the next 20 years at a total cost of about $1.1 trillion. Any trade war fears that could impact this deal going forward would have a significant impact on Boeing and we saw just a small adverse reaction in the stock price movement. Volume overall for the week on the three major indexes was below average despite higher than average daily volume on Friday as it was a quadruple witching day for options expiring.

 

The following were the top 5 and bottom 5 performing sectors over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Utilities 2.54%   Broker Dealers -1.97%
Global Real Estate 1.80%   Regional Banks -2.09%
Consumer Discretionary 0.01%   Financial Services -2.18%
Commodities 0.00%   Basic Materials -3.29%
Semiconductors -0.12%   Aerospace & Defense -3.38%

 

Four of the top five performing sectors last week were classic risk off trades as Utilities, Global Real Estate, Consumer Discretionary and Commodities all turned in flat to positive returns. The increase in Utilities was primarily driven by investors looking for yield as the yields on many fixed income investments declined last week. Semiconductors was the odd mover among the top five performing sectors last week as this sector is normally one of the largest decliners on weeks that the markets decline. However, Intel had a relatively strong week last week, helping to prop up the sector as strong demand for semiconductors continues to be seen around the world. On the negative side last week, Aerospace and Defense was brought down by the poor performance of Boeing, as mentioned above, leading the sector to decline by more than 3 percent. Basic Materials lost the second most last week as fears of global trade wars adversely impacted the sector. Financial related sectors made up the remaining three sectors on the negative side of performance last week as everyone waits to see how much the Fed policy statement and dot plot may change under the new chair.

 

US fixed income markets all increased last week pushing yields lower across the board. The primary driver of the bond market performance last week was a general lack of inflation being seen in the economic data that was released; more about that below in the economic news section.

 

Fixed Income Change
Long (20+ years) 1.61%
Middle (7-10 years) 0.44%
Short (less than 1 year) 0.02%
TIPS 0.16%

 

Best and Worst Currencies Change
US Dollar 0.30%
Venezuela bolivar 9.03%
Turkey lira -2.78%

 

 

The US dollar had an uneventful week, gaining 0.30 percent against a basket of international currencies as traders continue to try to assess the revolving door of employees at the White House and what, if any, impact it could have on the potential trade war and US dollar. The best performing currency last week was found in Venezuela and was the Bolivar, which gained 9.03 percent. While this may sound like a great move higher, it is less than a third of what the currency has lost of the past three weeks as the Bolivar continues to trade in a very erratic fashion. The worst performing currency last week globally was found in Turkey as the Lira declined by 2.78 percent.

 

Commodities were mixed over the course of the previous week as oil moved higher while all of the other commodities pushed lower:

Metals Change   Commodity Change
Gold -0.75%   GS Commodity Index 0.00%
Silver -1.54%   Oil 0.64%
Copper -1.10%   Livestock -0.92%
      Grains -1.70%
      Agriculture -0.83%

 

The GS Commodity index posted no change last week, as gains in oil were offset by losses in other commodities. Oil gained 0.64 percent as the heir apparent to the Saudi King visited several other countries around the world, including the US where he got a firsthand look at the oil shale production that is going on. Gold, Silver and Copper all posted losses last week, declining by 0.75, 1.54 and 1.10 percent, respectively. Soft commodities were down as well last week as Livestock declined 0.92 percent, while Agriculture overall decreased by 0.83 percent and Grains posted a loss of 1.70 percent.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
SET Thailand 2.05%   IPC All-Share Mexico -2.22%
Hang Seng Hong Kong 1.63%   RTS Index Russia -2.43%

Last week was a mixed week for the global financial markets as 41 percent of the major indexes advanced for the week. Thailand’s SET index posted the largest gain last week of any of the global indexes, advancing 2.05 percent. Russia’s RTS index turned in the worst performance of the week last week, giving up 2.43 percent last week as the UK expelled 23 Russian diplomats over a nerve agent poisoning as well as another suspicious death of a critic of Russian President Putin. Russian President Putin easily won a Presidential election over the weekend, but voter turn-out probably would not have been so great if it were not for the promise of cheap or free food being given out near many of the polling places.

The wild roller coaster movement of the VIX came to an end last week with the VIX only gaining 7.92 percent. It was the first week of the past seven that we did not see a double digit move either up or down on the VIX. With the current VIX reading of 15.80, it implies that a move of 4.56 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week was a full week for economic news releases with the primary focus of the releases being inflation indicators. There were two releases that meaningfully beat market expectations (highlighted in green below) and one that significantly missed market expectations (highlighted in red below):

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/13/2018 CPI February 2018 0.20% 0.20%
Neutral 3/13/2018 Core CPI February 2018 0.20% 0.20%
Negative 3/14/2018 Retail Sales February 2018 -0.10% 0.30%
Slightly Negative 3/14/2018 Retail Sales ex-auto February 2018 0.20% 0.40%
Neutral 3/14/2018 PPI February 2018 0.20% 0.10%
Neutral 3/14/2018 Core PPI February 2018 0.20% 0.20%
Positive 3/15/2018 Empire Manufacturing March 2018 22.5 15
Neutral 3/15/2018 Philadelphia Fed March 2018 22.3 23.7
Neutral 3/16/2018 Housing Starts February 2018 1236K 1283K
Neutral 3/16/2018 Building Permits February 2018 1298K 1330K
Positive 3/16/2018 University of Michigan Consumer Sentiment Index March 2018 102.0 99.5

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week, the economic news releases started on Tuesday with the release of the Consumer Price Index (CPI) for the month of February, which came in exactly in line with expectations at 0.2 percent when looking at overall CPI and at the core CPI calculation. On Wednesday, retail sales for the month of February were released and disappointed the markets with overall retail sales posting a decline of 0.1 percent versus the expected gain of 0.3 percent. When looking at retail sales excluding auto sales, the February number looked better, showing a gain of 0.2 percent, still below expectations, which were for 0.4 percent, but at least in positive territory. Also released on Wednesday was the Producer Price Index (PPI) for the month of February, which came in very close to market expectations, both overall and when only looking at the core calculation. Both the PPI and CPI numbers released last week indicate that inflation remains very subdued in the US economy, something the Fed will have to address at this week’s upcoming FOMC meeting, at which they are expected to raise interest rates. On Thursday, the Empire Manufacturing index for the month of March was released and came in significantly above markets expectations with a reading of 22.5, while the market had been looking for only 15. The Philly Fed index, also released on Thursday, fell slightly short of expectations, but remained in solid growth mode and was largely overlooked by the markets. On Friday, two pieces of US housing information, the housing starts and building permits figures, for the month of February were released with both coming in very close to market expectations and having no noticeable impact on the overall markets. Wrapping up the week last week was the release of the University of Michigan’s Consumer Sentiment Index for the month of March (end of February reading), which came in above expectations, positing a reading of 102.0, the highest reading for the index since April of 2004. The strong and unexpected reading from the consumer sentiment index combined with the poor reading from retail sales has some economists concerned that the US economy may be weaker than many people think as everyone waits to see if the tax cuts will have a positive impact on the overall economy.

 

This week is a slow week for economic news releases, but there are a few releases that could impact the overall movement of the markets. Releases that have the most potential to impact the overall markets this week are highlighted in green:

 

Date Release Release Range Market Expectation
3/21/2018 Existing Home Sales February 2018 5.42M
3/21/2018 FOMC Rate Decision March 2018 1.63%
3/23/2018 Durable Orders February 2018 1.50%
3/23/2018 Durable Goods –ex transportation February 2018 0.60%
3/23/2018 New Home Sales February 2018 620K

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week the economic news releases start on Wednesday with the release of the existing home sales figure for the month of February, which is expected to post a reading of 5.4 million units. Likely overshadowing the existing home sales figure on Wednesday is the conclusion of the March FOMC meeting of the Federal Reserve. This meeting is the first FOMC meeting with a press conference and an expected rate hike for new Fed Chair Jerome Powell. This meeting is also one of the meetings after which the Fed releases their latest rate expectations in the form of the dot plot. The dot plot always draws a lot of attention from Wall Street as the street tries to decipher which dots belong to which Fed officials and what it could mean of the future of Fed rate hikes. Aside from the dot plot, the markets will be very closely watching and listening for any indication of a fourth rate hike being in the cards during 2018. On Friday this week, the February durable goods orders figures are set to be released with expectations of 1.5 percent growth overall and 0.6 percent when excluding transportation. With the poor reading on retail sales that we saw last week, it would not be surprising to see both durable goods orders figures miss market expectations. Wrapping up the economic news releases this week is the release of the February new home sales figure, which, much like the other housing related releases for the month of February, should have no meaningful impact on the overall markets. In addition to the FOMC meeting and press conference that follows, there are three other Fed officials giving speeches next week that the markets will be watching very closely for clues about future Fed actions.

 

Interesting Fact —Toys ‘R’ Us is closing down

It was announced last week that Toys ‘R’ US will liquidate all its remaining stores after struggling for years to overcome a mountain of debt. The brand, which started in June of 1957, is recognizable to almost all adults that grew up during the 1970’s, 1980’s and 1990’s. The “R” in the logo was designed backwards so that it looked like a child wrote the name. Geoffrey the Giraffe was added to the brand in May of 1965 and remained part of the logo thereafter.

 

Source: Toysrusinc.com