For a PDF version of the below commentary please click here Weekly Letter 6-18-2018

Commentary quick take:

 

  • Major developments:
    • North Korea summit has taken place
    • US Fed raised rates
    • ECB left rates alone, but changed the QE program

 

  • US:
    • June FOMC meeting raised rates
    • More Chair Powell press conferences in the future
    • Mixed messages in Fed statement

 

  • Global:
    • “Agreement” signed with North Korea
    • ECB to end QE bond buying
    • US trade war with China is a go
    • Trump’s move
    • OPEC

 

  • Hybrid investments strategy update:
    • Two changes

 

  • This week for the markets:
    • Summer slow down
    • OPEC meeting showdown

 

  • Interesting Fact: Human caused earth quake?

 

 

Major theme of the markets last week: North Korean – US deal?

Following the poor ending to the G7 summit in Canada on June 10th, President Trump departed for his meeting with North Korean Leader Kim Jong Un in Singapore. The meeting between the two leaders took place on June 12th at a secluded island resort, following several weeks of negotiations and some walking about the town in Singapore by Kim the night before the summit. With both sides claiming victory following the meeting, the global media immediately started to analyze the agreement that was drafted and signed by the two leaders. In the agreement, North Korea agreed to denuclearize, but the US clause of “verifiable” is missing from the agreement, so it is more of an honor agreement. President Trump agreed to end the US military’s war games with South Korea and pledged the US would “provide security guarantees” to North Korea. Many experts, including Christopher Hill who was the US ambassador to South Korea under President Obama, have commented that North Korea didn’t give up anything in the agreement. The items North Korea committed to had already been agreed to months ago, leading up to the winter Olympics in South Korea. While negotiations between the two sides is preferable to war breaking out on the Korea Peninsula, this agreement requires a lot more work to make waves toward peace. For the time being, the sanctions the US and the rest of the world imposed on North Korea will remain in place until measured steps toward denuclearization have taken place. Both leaders agreed that further work needs to be undertaken.

 

 

 

US news impacting the financial markets:

 

The primary headline aside from the North Korean Summit last week was the June meeting of the Federal Reserve Open Market Committee (FOMC). Going into the meeting, which started on Tuesday and concluded on Wednesday, the markets had already priced in a rate hike at the end of the meeting. This turned out to be the correct assessment. The reason for the rate hike this month seemed to be the strength we have seen recently in the US labor market and the hope that this labor market tightness will generate inflation at some point in the future. Currently, inflation remains the puzzle piece that no Fed officials can find to complete the picture for the Fed and fully justify increasing rates. In looking at the June statement, there were several interesting changes that the markets took notice of, with the first being that the Fed thinks the economy is “rising at a solid rate,” despite a general lack of spending increases that we have seen on a variety of different economic indicators. The financial markets and fixed income market reacted to the change in the forward guidance about rates when the statement said that the Fed funds rate would remain “for some time” below where they expect the rate to be over the longer term. With June being the middle of the year FOMC meeting, the Fed also released its latest Summary of Economic projections, which the markets are always very keen to look toward for any meaningful changes. The GDP growth rate for 2018 was bumped up by 0.1 percent, while it was unchanged for 2019. The unemployment rate moved down just a touch to 3.5 percent for the next two years and then mysteriously jumps back up to 4.5 percent for the long run terminal rate projection. Two percent remained the target rate of inflation in the projections for both the short and long term, despite some economists thinking the Fed would likely lower the target rate in the short term and leave it in place for the longer term. The long run Fed funds rate was adjusted downward by 0.5 percent down to 2.9 percent.

 

Following the release of the statement, Chair Powell held a press conference at which he took numerous questions from the media, but it was something else he said that caught the markets by surprise. Chair Powell announced that there would be a press conference at the end of each FOMC meeting moving forward, not just four times per year, starting in January of 2019. This small change makes a big difference to when the markets now predict the Fed will raise rates. It was originally thought that the Fed would only raise rates at meeting that had an ensuing press conference. This was because the Chairman would be able to take questions about the actions from the meeting and quell any uncertainty as to the reasoning. With a press conference following each meeting, all meetings are potentially rate hike meetings and there is less certainty over which meeting will see hikes. Economic projections by the Fed will still only be updated on a semiannual basis. In looking at what was said at the press conference and in the statement, the markets are currently pricing in two more rate hikes in 2018 and then four rate hikes in 2019.

 

Global news impacting the markets:

 

The US Federal Reserve was not the only central bank to meet last week as the European central bank (ECB) also held a very important meeting. Leading up to the June ECB meeting there had been much speculation about what, if any, changes ECB President Draghi may make to the Quantitative Easing (QE) program the bank has been running for many years. On Thursday, ECB President Draghi announced that the ECB would end the Quantitative bond buying program know as QE by the end of 2018; a buying program that saw the ECB purchase more than €2 trillion worth of bonds. To help offset the uncertainty about future movements of the ECB with the bond buying program coming to an end, President Draghi also announced that the ECB would leave interest rates at zero until at least the summer of 2019. The actions by the ECB on Thursday sent the euro diving lower in one of the largest single day movements that we have seen so far in 2018. When discussing risks to the Eurozone as well as the global financial system, President Draghi called out trade wars and protectionist trade models as the biggest risk he sees on the horizon. Within Europe itself, populist movements that seem to have no regard to fiscal responsibility are also a perceived threat, in a thinly veiled shot at the newly seated Italian government. Reflecting President Draghi’s concerns about trade wars last week, there were several developments on that front globally.

 

On Thursday last week, the Trump administration released the list of goods coming in from China that will be subject to tariffs starting July 6th. China retaliated on Friday with its own list of products from the US that will see a tariff imposed, including US oil that makes its way to China. Many other commodities were also on China’s list as the country attempts to hit a very narrow Trump support segment of the overall US economy. President Trump had said previously that if China added any retaliatory tariffs to the $50 billion of tariffs he was imposing, he would take even further action, adding tariffs to an additional $100 billion of Chinese goods. With China adding retaliatory tariffs, it is now President Trump’s move to either increase tariffs on China or be called on a bluff by China. It is very likely that he will follow through with more tariffs as he thinks he cannot let the US show weakness to China at almost all cost when it comes to trade. Currently, we look to be headed into a trade war with China. However, both sides have said that tariffs will not be imposed until July 6th, meaning there is still time to back away from the edge and let cooler heads prevail on trade policy between the two countries.

 

OPEC also made headlines last week as it came out that Saudi Arabia is considering proposing lifting the production caps on OPEC at this week’s meeting. The request comes directly from US President Trump who knows Republicans could be in trouble at the polls if gas prices remain high in November. Saudi Arabia is rumored to be considering bumping output by 1.5 million barrels a day for OPEC with up to 1 million barrels coming from Saudi Arabia. This is being done under the guise of offsetting slowing production from Venezuela and Iran, according to Saudi Arabia. However, things are likely to heat up at the OPEC meeting in Vienna this week as at least three OPEC members have said they will stand together to veto any change in the production targets of the group. This type of showdown has taken place within OPEC before, but in the past Saudi Arabia has always gotten its way as the country has run the group with an iron fist. This time, however, it looks like the Saudis may have to give way to the wishes of the group, despite the decision likely pushing oil higher and against the wishes of President Trump.

 

Hybrid model performance and update

For the trading week ending on 6/15/2018, 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 0.37% -1.80% 5.20%
Aggressive Benchmark -0.33% 0.83% 6.39%
Growth Model 0.28% -1.36% 4.54%
Growth Benchmark -0.26% 0.82% 5.17%
Moderate Model 0.19% -1.06% 3.58%
Moderate Benchmark -0.17% 0.79% 3.91%
Income Model 0.16% -1.38% 3.04%
Income Benchmark -0.07% 0.72% 2.28%
Quant Model -0.09% -3.81%
S&P 500 0.02% 3.97% 10.59%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were two changes last week to the hybrid models with the first being to increase the position in the Rydex Midcap Growth Fund (RYBHX). With the merger between Time Warner and AT&T approved by the courts following President Trump’s vow to stop the merger, it looks like the precedent has been set to allow for further vertical integration deals. There are many sectors in which vertical integrations that previously would have been thought of as likely to be struck down by the government are now being reconsidered. Many of these target companies likely fall in the midcap market space as larger competitors take out their rivals, hence one of the reason for adding to the position. The second change in the hybrid models late last week was to sell part of the hedging positions that remained in the models as the amount needed to hedge downside risks has subsided slightly. There remains a partial hedging position across all of the hybrid models against both the S&P 500 and the Dow to act as a sort of airbag should the markets decline meaningfully from current levels.

 

Market Statistics:

 

Index Change Volume
NASDAQ 1.32% Above Average
S&P 500 0.02% Above Average
Dow -0.89% Above Average

 

Trade war talk hurt large industrial companies last week, as evident by the performance of the three major US indexes. The industrial heavy Dow turned in the worst performance, led lower by Alcoa, and General Electric, as both companies were specifically brought up in the trade war discussion. The S&P 500 having a solid weighting to both industrial and high technology names came in with the middle performance last week, posting a gain slightly above zero. Leading the way higher last week was the technology heavy NASDAQ, which posted a gain of more than one percent thanks to significant increases in Tesla Motor (+12.75%) and Netflix (+8.71%) as large cap technology pushed the index higher.

 

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
Healthcare Providers 2.92% Regional Banks -2.51%
Utilities 2.44% Natural Resources -2.89%
Consumer Service 2.39% Aerospace & Defense -3.01%
Multimedia Networking 2.17% Energy -3.22%
Consumer Goods 1.97% Oil & Gas Exploration -3.72%

 

The sector performance last week was very interesting given the performance of the overall indexes. Multimedia Networking, coming in fourth best, is the only NASDAQ heavy sector to make the top performing list despite the strong performance of the overall NASDAQ. Historically defensive sectors of the markets led the way for the most part as Healthcare Providers, Utilities, Consumer Services and Consumer Goods took four of the top five spots in sector performance. On the negative side, a decline in the price of oil took down three of the five worst performing sectors as talk of a production increase by OPEC sank the black gold. Aerospace and Defense came in third from the worst as the sector’s products will likely be the target of ongoing trade war tensions as they are very high dollar items that impact a relatively small sector of the US economy. Regional Banks took the fifth and final spot last week after falling more than 2.5 percent as the US Federal Reserve now looks poised to increase rates faster than some had predicted.

 

Bond yields decreased last week following the announcement of the Fed rate hike at the end of their FOMC meeting, which was a foregone conclusion. The movement last week in the yield curve was as expected with the overall curve shifting downward rather than flattening or steepening.

 

Fixed Income Change
Long (20+ years) 0.71%
Middle (7-10 years) 0.12%
Short (less than 1 year) 0.04%
TIPS 0.15%

 

Best and Worst Currencies Change
US Dollar 1.34%
Indonesia rupiah 0.14%
Argentina peso -9.87%

 

 

Despite a potential trade war and falling global oil prices, the US dollar managed to post a solid gain of 1.34 percent against a basket of international currencies last week. The best performing currency last week was found in Indonesia with the Rupiah, which added 0.14 percent against the value of the US dollar. The worst performing currency globally was found in Argentina as the peso declined by 9.87 percent. The decline in the peso last week was largely due to a surprise resignation of the Central Bank of Argentina’s President Federico Sturzenegger, who over the past few weeks has been taking drastic steps to try to stop the plunging value of the peso, including securing a widely unpopular IMF rescue loan.

 

Commodities were mixed last week as Livestock managed to post a gain, while all of the other commodities posted losses:

Metals Change Commodity Change
Gold -1.36% GS Commodity Index -2.80%
Silver -1.14% Oil -1.66%
Copper -4.62% Livestock 0.41%
Grains -5.48%
Agriculture -1.65%

 

The GS Commodity index posted a loss of 2.80 percent last week. Oil declined 1.66 percent, as talk of a production increase by several key OPEC countries has left many members of the group at odds with each other in what will likely be a test of Saudi strength over the group. Gold, Silver and Copper posted losses last week, falling 1.36 percent, 1.14 percent and 4.62 percent, respectively. Soft commodities were mixed last week as Livestock advanced 0.41 percent, while Agriculture overall decreased by 1.65 percent, being drug down by a continued tumble in Grains, which dropped 5.48 percent, bringing the group to a two week decline of more than 10 percent.

 

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
FTSE MIB Italy 3.91% Sao Paulo Bovespa Brazil -2.99%
IPC All-Share Mexico 2.18% Merval Argentina -4.12%

Last week was a split week in terms of international performance as 52 percent of the indexes posted gains. The largest gain was seen in Italy with the FTSE MIIB index advancing by 3.91 percent last week. The movement in Italy seemed to be more about value investors looking for areas of the global markets that had been beaten down the most over the past few months and homing in on Italy with all their political uncertainty that had hit the local markets recently. The worst performance globally last week was found in Argentina as the Merval index declined by 4.12 percent after a strong gain two weeks ago on the back of an IMF bailout.

The VIX continued to be very complacent last week as it declined by 3 percent, ending the week below 12 for the first time since early January. With the current VIX reading of 11.98, a move of 3.46 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week, the economic news releases focused on inflation and the June FOMC meeting:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 6/12/2018 CPI May 2018 0.20% 0.30%
Neutral 6/12/2018 Core CPI May 2018 0.20% 0.20%
Neutral 6/13/2018 PPI May 2018 0.50% 0.30%
Neutral 6/13/2018 Core PPI May 2018 0.30% 0.20%
Neutral 6/13/2018 FOMC Rate Decision June 2018 1.875% 1.875%
Positive 6/14/2018 Retail Sales May 2018 0.80% 0.40%
Positive 6/14/2018 Retail Sales ex-auto May 2018 0.90% 0.50%
Positive 6/15/2018 Empire Manufacturing June 2018 25 20
Neutral 6/15/2018 University of Michigan Consumer Sentiment Index June 2018 99.3 99

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 May. Prices at the consumer level for the month came in very close to market expectations when looking at both overall CPI and Core CPI, which excludes food and fuel price changes. On Wednesday, the Producer Price Index (PPI) was released and came in very close to market expectations, much like the CPI figures released on Tuesday. Both the CPI and PPI data are signaling that inflation remains far lower than the Fed would like currently in the US economy and it does not look like it will pick up meaningfully any time soon. The main story line on Wednesday, however, was not the PPI data, but rather the conclusion of the June FOMC meeting at which the Fed decided to increase interest rates, as discussed above in the nation al news section. On Thursday, the May retail sales figures were released with surprising, strong readings on overall sales and sales excluding automobiles. This positive surprise was a nice lift to the markets as it seemed to signal that the US consumer still believes in the economic expansion that is starting to get very long in the tooth. On Friday, the Empire manufacturing index and the University of Michigan Consumer Sentiment Index for the month of June were both released with the Empire manufacturing index for the month of June handily beating market expectations, coming in at 25 versus expectations of 20, as manufacturing in the greater New York area does not seem to be negatively impacted by the trade war discussions going on around the world. Wrapping up the week last week was the release of the University of Michigan’s Consumer Sentiment index for the month of June (mid-month reading), which came in very close to market expectations and had no noticeable impact on the overall markets.

 

This week is a slow week for economic news releases with housing data making up the bulk of the announcements. The releases that would normally have the most potential to impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
6/19/2018 Housing Starts May 2018 1323K
6/19/2018 Building Permits May 2018 1343K
6/20/2018 Existing Home Sales May 2018 5.55M
6/21/2018 Philadelphia Fed June 2018 27

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

 

The economic news releases this week start on Tuesday with the release of the housing starts and building permit figures for the month of May, which are both expected to post readings slightly over 1.3 million. If we see both post 1.3 million or better, it will be a sign that the US housing market is continuing to move forward despite higher tariffs on Canadian lumber and other rising costs to manufacturers. On Wednesday, we get the latest existing home sales figure for the month of May, which should post a reading of more than 5.5 million units given the strength that we have been seeing in other recent housing data. Wrapping up the week this week for economic news releases is the release of the Philadelphia Fed index, which is expected to post a solid figure of 27, but a figure that is significantly lower than the 34.4 reading that we saw in May. Consensus thinking by economists on the May reading over 34 was that inventory management contributed a lot to the strong growth and that this is unlikely to continue in the future. In addition to the scheduled economic news releases, there are six speeches being given by Fed officials with the most important one coming on Wednesday as Chair Powell speaks about the current state of the economy. As is always the case, it is unlikely that any new meaningful information will be released at these speeches, but some investors are always hopeful that someone will slip up and say something unexpected.

 

Interesting Fact — World Cup Earth Quakes

 

There was a very exciting game at the World Cup this past weekend as Mexico took on the defending champion, Germany. Mexico was the underdog in the game, but it quickly became apparent that the team stood a good chance of winning. Even more impressive than Mexico’s win was the fact that 7 seconds after Hirving Lozano scored a goal, an earthquake tremor was recorded at two different locations in Mexico City. The reason given by the monitoring agency is that the tremor was likely caused by so may people jumping up and down in Mexico City at the same time.

 

Source: UK Independent

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For a PDF version of the below commentary please click here Weekly Letter 6-11-2018

Commentary quick take:

 

  • Major developments:
    • Positive week for the markets
    • G7 meeting was interesting to say the least!

 

  • US:
    • More job openings than unemployed workers
    • All eyes on the Fed

 

  • Global:
    • G7 meeting ended with a tweet bomb
    • Central bank meetings
    • Argentina has been bailed out

 

  • Hybrid investments strategy update:
    • Three changes

 

  • This week for the markets:
    • Fallout from G7 meeting
    • Korean peace summit
    • FOMC June meeting
    • ECB June Meeting

 

  • Interesting Fact: City states

 

 

Major theme of the markets last week: G7 summit in Canada

The G7 summit (or G6-plus-1 summit, depending on how you look at it) was the primary focus of the global financial markets last week. It presented the chance for a break-though moment in global trade policies. Going into the meeting, investors around the world knew it would be a potentially contentious meeting as US President Trump had unabashedly called out nearly all of the other countries for their unfair trade practices with the US. The meeting started with an even more bizarre comment from President Trump than was expected when he called for Russia to be allowed back into the elite group, a call which fell on deaf ears. Some of the comments coming out from world leaders regarding the G7 meeting was that there was some “common ground” but, in the end, it was “deeply disappointing” and “difficult.” Perhaps the biggest surprise was that it was believed a consensus had been agreed to by all parties and that the official communiqué would be released. However, once on Air Force One (President Trump left the meeting early to fly to Singapore) and after reading some of Canadian Prime Minister Justin Trudeau’s comments about the meeting, President Trump announced that he and the US would not be signing the official communiqué. “Fair trade is fool trade” also made headlines shortly after President Trump left the meeting, further adding fuel to the fire of global trade. All countries outside of the US attending the meeting said it was President Trump’s “America First” policy that doomed the meeting and should bear the blame for the current global trade situation. With the failure of this meeting, we will have to wait and see if a trade war erupts between the US and almost all other developed countries. The global equity markets correctly guessed the outcome of this meeting; there was very little reaction to the news of the meeting not going well in any of the global markets over the weekend and in the pre-market trading here in the US on Monday.

 

US news impacting the financial markets:

 

Aside from politics leading up to the G7 summit and the upcoming Korean Summit, the primary focus of the US financial media last week was on the employment market here in the US. The big surprise last week came in the form of the JOLTS data, which provides figures showing the number of job openings in the US. For the first time on record, the number of jobs open in the US with employers looking for employees exceeded the total number of people who are currently unemployed in the US. The data was slightly stale, in that it was for the month of April, but it is unlikely that there have been any significant changes between the April data and more current data that will be released in the coming weeks. Also in the JOTS data, the reported number of hirings during the month of April was 5.6 million, which is more than 1 million short of the number of openings reported at the time. While all of this may sound very good for the US economy, it presents a very interesting problem because many of the people who are unemployed are not qualified for the open jobs currently seeking workers. Training appears to be one of the sticking points as companies looking to hire people want them to already be knowledgeable about their new position and the unemployed person normally doesn’t have the money or time to get the training needed to work the open position. This presents a difficult catch 22 for the US economy, the Fed and investors. One other issue related to the jobs market that continues to come up is the fact that there is very little wage inflation, thus a lack of ever increasing incentives for unemployed people to move back into gainful employment.

This lack of wage inflation and almost any other kind of inflation has become one of the primary sticking points when investors consider future Fed policy on interest rates. Currently, there is a nearly 100 percent certainty that the Fed will raise rates at this week’s upcoming FOMC meeting that starts on Tuesday and concludes on Wednesday with a press release and press conference. This rate hike is not what has investors uneasy about future Fed policy, however, it is the thought that this could signal that the Fed will raise rates two more times in 2018 (four times in total), and four times or more in 2019. This would see the Fed funds rate a full 2 percent or more higher than where we started 2018. There is some uncertainty about whether that increase in rates would be too much for the markets to handle.

 

Global news impacting the markets:

 

Several other central bank meetings took place around the world last week. The Reserve Bank of Australia left its primary interest rates unchanged, as was expected by the markets. In the current global rate environment, the developed countries have much more leeway than emerging markets when it comes to the interest rates they have to offer to attract foreign investment into the country. Australia doesn’t have a funding issue, so it could afford to not raise rates. The Reserve Bank of India, on the other hand, had to raise rates by 0.25 percent for the first time since early 2014 as the country tries to fend off inflation that is currently running at a more than 4.5 percent annualized rate. Another emerging market, Argentina, also made headlines last week as it was rescued by the IMF.

 

Last week, Argentina was awarded the single largest loan the IMF has ever given out, at a value of $50 billion. The bailout comes with all kinds of strings attached to it, but for the time being it looks like it may be enough to stabilize the falling peso as well as the country’s fixed income markets. Remember that not too long ago, the central bank in Argentina was forced to raise its target interest rate to 40 percent. Inflation continues to run very high and one of the main conditions to the IMF bailout is that the government reigns in the inflation rate currently being seen in the country. The agreement also has some protections for the IMF, which the institution seems to have learned from the situation in Greece several years ago. Under the agreement, the central bank of Argentina is no longer allowed to fund the federal deficit, essentially printing money to cover the government’s expenses so that the books balance without regard to inflation or the downward pressure such actions have on the local currency. This could become the sticking point over the next 3 years (the life of the loan) as it seems like a very tall order for the Argentina government (which has a major election next year) to undertake the fiscal restraints that will be needed to fulfill the loan obligations, while managing to hold on to political power within the country. When the loan was announced last week, there were almost immediately riots in the street as many residents of the country are against the bailout funds.

 

Hybrid model performance and update

For the trading week ending on 6/8/2018, 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 0.69% -2.16% 5.11%
Aggressive Benchmark 1.13% 1.16% 6.55%
Growth Model 0.60% -1.64% 4.47%
Growth Benchmark 0.88% 1.08% 5.29%
Moderate Model 0.56% -1.25% 3.54%
Moderate Benchmark 0.64% 0.97% 4.00%
Income Model 0.56% -1.54% 3.01%
Income Benchmark 0.34% 0.79% 2.32%
Quant Model 0.42% -3.73%
S&P 500 1.62% 3.94% 10.66%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were three changes to the hybrid models over the course of the previous week. The first changes were early in the week last week and were buying further into two already held positions. The positions were the SPDR Small Cap Growth ETF (ticker SLYG) and the John Hancock Multifactor Technology Fund (ticker JHMT). Following the purchases last week, both positions are now at two thirds of a full position within the models. The third change last week was the selling of a long held individual stock; Aqua America (ticker WTR). The position had been a good performer for the hybrid models over the years, especially when you consider that it is a utility stock that paid out a strong dividend the whole time. However, the position was starting to be under significant interest rate pressure as well as business pressure in its nonresidential natural gas drilling operations. Currently, the money that was raised from the sale of WTR is being held in cash, but there are a few different possibilities for it being reinvested in the very near future so stay tuned.

 

Market Statistics:

 

Index Change Volume
Dow 2.77% Average
S&P 500 1.62% Above Average
NASDAQ 1.21% Average

 

It was a strong week for the US markets last week. We saw an interesting rotation out of the areas of the markets that had been performing the best so far during 2018 as investors rebalanced their holdings. The Dow took top honors, gaining nearly 3 percent, while the NASDAQ lagged. Overall volume last week was either average or above average on all three of the major indexes, which is odd given the summer trading season, during which trading is normally lighter than average unless there is some big event that occurs during 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
Home Construction 4.66%   Biotechnology 0.25%
Consumer Service 2.93%   Semiconductors -0.14%
Consumer Goods 2.93%   Oil & Gas Exploration -0.66%
Basic Materials 2.79%   Infrastructure -0.89%
Pharmaceuticals 2.75%   Utilities -2.94%

 

Last week saw a flip from risk-on to risk-off positions, evident in the sector performance. Defensive sectors that had been beaten down such as Home Construction, Consumer Services and Consumer Goods turned in the best performance as continued talks of trade wars didn’t seem to have any negative impacts on the sectors. Basic Materials came in fourth. Pharmaceuticals rounded out the top five performing sectors thanks to a few large moves from key pharmaceutical companies related to drug research. On the flip side, high risk sectors including Oil and Gas Exploration, Semiconductors and Biotechnology all made the bottom 5 performing sectors in the classic risk-off trade. Two outliers existed as Infrastructure and Utilities also made the negative performing list with Utilities falling the most. As various data came out last week, it became clear that the Fed could be thinking of increasing its interest rate expectations soon, which in turn hit the interest rate sensitive Utilities sector significantly harder than other sectors. The decline in Infrastructure last week seemed to be more of a political statement about the potential outcome in November than anything else as Democrats taking the House could pose issues for lofty infrastructure spending ideas.

 

Bond yields increased last week in the middle and longer end of the yield curve as fixed income investors tried to judge the future movements of the Fed. The short end of the yield curve increased slightly, thus causing an overall flattening of the curve to occur when looking at yields across the US fixed income government market.

 

Fixed Income Change
Long (20+ years) -0.64%
Middle (7-10 years) -0.22%
Short (less than 1 year) 0.03%
TIPS -0.06%

 

Best and Worst Currencies Change
US Dollar -0.65%
Turkey lira 3.95%
South Africa rand -2.92%

 

 

The US dollar had a tame week last week as it declined 0.65 percent against a basket of international currencies. The best performing currency last week was found in Turkey with the Lira, which added 3.95 percent against the value of the US dollar. The worst performing currency globally was found in South Africa as the rand declined by 2.92 percent. Last week was the first week in several months that we did not have one of the Latin American currencies on the top or bottom currency performance lists.

 

Commodities were mixed last week as agriculture struggled, while many of the other commodities turned in good returns:

Metals Change   Commodity Change
Gold 0.42%   GS Commodity Index 0.06%
Silver 2.20%   Oil 0.15%
Copper 7.27%   Livestock 2.26%
      Grains -3.54%
      Agriculture -1.93%

 

The GS Commodity index posted a gain of 0.06 percent last week. Oil gained only 0.15 percent, in what turned out to be a boring week for the commodity that had been seeing significant movement both up and down over the past few months as changes from OPEC and fears over Iranian oil sanctions roiled the global oil market. Gold, Silver and Copper posted gains last week, gaining 0.42 percent, 2.2 percent and 7.27 percent, respectively. The jump in Copper was primarily due to ongoing wage negotiations in Chile at the world’s largest copper mine. Soft commodities were mixed last week as Livestock advanced 2.26 percent, while Agriculture overall decreased by 1.93 percent, being drug down by a tumble of 3.54 percent in the price of Grains.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Merval Argentina 10.58%   FTSE MIB Italy -3.41%
S & P/NZX 50 New Zealand 3.50%   Sao Paulo Bovespa Brazil -5.56%

Last week was a good week in terms of international performance as 67 percent of the indexes posted gains. The largest gain was seen in Argentina with the Merval index advancing by 10.58 percent last week. The movement was more a relief movement than anything else as Argentina was given a 3-year $50 billion loan from the IMF. The money was badly needed by the country as just two weeks ago people were speculating if the country would go bankrupt without a bailout being provided by the IMF. The worst performance globally last week was found in Brazil as the Sao Paulo based Bovespa index declined by 5.56 percent as corruption remains a major hurdle for the country trying to attract foreign investment.

We finally have a weekly move of more than 2 percent on the VIX last week as the fear gauge declined by 4.4 percent. We had seen multiple weeks in a row with less than 2 percent overall movement in the VIX, which is a rare occurrence. The VIX continues to be very complacent about what is going on in the world and largely ignoring or deeply discounting the chances that something does not turn out positive on the global stage. With the current VIX reading of 12.18, a move of 3.52 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week, there was a single economic news release on the calendar and it came in very close to market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 6/5/2018 ISM Services May 2018 58.6 58.0

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

 

The lone release last week was released on Tuesday and was the Services side of the ISM index that indicated that the services sector of the US economy continued to expand during the month of May. The expansion was a middle-of-the-road expansion; not too fast and not too slow and therefore had little noticeable impact on the overall markets.

 

It is an interesting week for economic news releases as all but one of the releases will likely be overshadowed by the developing geopolitical situations. The releases that would normally have the most potential to impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
6/12/2018 CPI May 2018 0.30%
6/12/2018 Core CPI May 2018 0.20%
6/13/2018 PPI May 2018 0.30%
6/13/2018 Core PPI May 2018 0.20%
6/13/2018 FOMC Rate Decision June 2018 Hike
6/14/2018 Retail Sales May 2018 0.40%
6/14/2018 Retail Sales ex-auto May 2018 0.50%
6/15/2018 Empire Manufacturing June 2018 20
6/15/2018 University of Michigan Consumer Sentiment Index June 2018 99

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

 

This week the economic news releases start on Tuesday with the release of the Consumer Price Index (CPI) for the month of May. Prices at the consumer level for the month are expected to post a very small gain of 0.3 percent overall, while prices excluding food and fuel are expected to post a 0.2 percent gain. On Wednesday, the Producer Price Index (PPI) is set to be released with the exact same readings as the CPI expected. Taken in tandem, all four of these inflation readings for the month of May are expected to show very little inflation currently occurring in the US economy. This general lack of inflation will likely come up in the FOMC decision on rates that will be announced on Wednesday as well as at the post-meeting press conference. With a hike at this meeting of 0.25 percent a foregone conclusion, the questions for the markets will become: how many more times in 2018 and 2019 will the Fed hike rates and will the Fed change its positioning to count on rate hikes unless there is a drastic change in the economic data coming in? Currently, the Fed is not on a preset course of hikes; all rate hikes are dependent on economic data, leaving the markets speculating about each hike. On Thursday, the May real sales figures are set to be released with a very small increase over the growth rates seen in April expected to be seen.  On Friday, the Empire manufacturing index and the University of Michigan Consumer Sentiment Index for the month of June are both set to be released with little change over the May reading expected on both releases. With this week being an FOMC meeting there are no comments from Fed officials scheduled aside from the press conference that will be held by Chair Powell following the meeting.

 

Interesting Fact City states

 

There are only three City states in the world and one of them, Singapore, will be getting a lot of attention this week as it hosts the summit between President Trump and Kim Jong Un. The other two City states in the world are Vatican City and Monaco.

 

Source: Tripsavy

For a PDF version of the below commentary please click here Weekly Letter 6-4-2018

Commentary quick take:

 

  • Major developments:
    • Mixed week for US markets
    • US hits major trading partners
    • Things settled down in Italy and Spain

 

  • US:
    • 18 year low on unemployment rate
    • FOMC rate hike in May almost certain
    • 1st Quarter earnings season ended

 

  • Global:
    • Italy has a seated government
    • Spain has a new Prime Minister
    • Korean summit back on

 

  • Hybrid investments strategy update:
    • No changes to hybrid strategies

 

  • This week for the markets:
    • G7 summit
    • Trade wars
    • Geopolitics

 

  • Interesting Fact: Thirst for Knowledge

 

 

Major theme of the markets last week: If this is how we treat friends…

Last week, the focus of the global markets was the potential for a large-scale trade war between the US and almost every other country. Though the week was shortened for the Memorial Day holiday, there were still plenty of announcements that impacted the financial markets. The largest was well depicted in Jeff Koterba’s cartoon from the Omaha World-Herald as it showed the tariffs that went into effect at midnight on June 1st against many of the US’s main trading allies. Prior to June 1st, tariffs of 10 and 25 percent were proposed and announced by the Trump administration on all trading partners, but they had not gone into effect as there were still “ongoing negotiations.” All of that ended last week when the announcement was made that the tariffs would go into full effect. Canada (the largest US trading partner) was the first country to condemn the move with Canadian Prime Minister Justin Trudeau calling the move “totally unacceptable” and suggesting it may violate international trade laws. This call was echoed by many EU countries as well as Mexico. The legality of the administration’s actions may very well end up in a court case with the World Trade Organization (WTO), the global governing body for trade disputes. So far, only Canada has produced a list of goods it will impose a reciprocal tariff on for Canada to make up for every lost dollar of trade due to the US tariffs. The EU answer was perhaps the most troubling as the group said it will be imposing $3.5 billion worth of tariffs on US goods with a focus on US agricultural and industrial products. In a tit-for-tat, President Trump said he was considering a 25 percent tariff on all imported cars from the EU. This type of logic or illogic, depending on how you look at it, makes it easy to see that this could quickly spiral out of control. In the end, the US consumer still looks to be the most at risk as many imported goods that could see tariffs levied against them are low cost items that will see the prices increase and be inflationary for the US economy.

 

US news impacting the financial markets:

 

Aside from the trade war topic, the US saw some interesting economic news last week that had a noticeable impact on the overall market. The unemployment rate in the US declined to 3.8 percent during the month of May, as shown by the Department of Labor release on Friday last week. This 3.8 percent reading was an 18 year low for the measure and signals that while the Fed’s inflation target may not yet have been hit, its mandate of full employment certainly has. The reason for the decline in the unemployment rate likely had more to do with the decline in the labor force participation rate than anything else, as it dipped to 62.7 percent. Eighteen years ago, when the unemployment rate was down at 3.8 percent, we had a 67 percent labor force participation rate and the US economy was growing by 4.1 percent. Those numbers signal a much more robust economic expansion compared to the slow growth and low participation rate we are seeing currently. One thing the employment related data did last week was solidify this month’s rate hike at the May FOMC meeting.

 

This is the last week for a table showing the results of corporate earnings for the first quarter of 2018. 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:

 

Burlington Stores 16% Dollar General -3% Guess 0%
Costco Wholesale 1% Dicks Sporting Goods 40% HP 0%
SalesForce.com 61% Dollar Tree -3% Ulta Salon 6%

 

SalesForce turned in a strong quarter as the company’s cloud-based technology saw a large uptick in users during the first quarter as more small businesses moved onto the platform. Dicks Sporting Goods had a strong quarter as the company continues to enjoy being the largest sporting goods retailer in the US since the downfall of Sports Authority. However, the company did cite online sales pressures as a leading cause for concern going forward as the company tries to deal with the likes of Amazon and Walmart for consumers’ attention when shopping online. On the negative side last week, deep discount retailer companies Dollar General and Dollar Tree both posted disappointing results. The very early Easter, combined with the cool and wet weather at the start of spring, were two reasons that were given for the poor performance of the two companies. Costco turned in a solid quarter last week, beating analysts’ expectations. However, the stock declined on the reported results as the company’s’ margins continued to show pressure from competition.

 

According to Factset, more than 98 percent of the S&P 500 component companies have now reported for the first quarter of 2018. In these reports, 78 percent have beaten earnings estimates, while 6 percent have met expectations and 17 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 77 percent of the companies have beaten estimates, while 23 percent have fallen short. The final overall blended earnings growth rate for the S&P 500 was 24.6 percent, the highest reading since third quarter of 2010. Overall, the first quarter results were very strong for corporate America as many sectors benefitted from changes to the tax code as well as continued support from US consumers. Going forward, Factset data indicates that the growth rate for earnings will likely fall back a little to 18.9 percent, as more companies start to feel less of a positive impact from tax reform and more headwinds from administration actions such as tariffs.

 

Global news impacting the markets:

 

Global financial news focused primarily on the actions taken by the Trump administration around trade policies last week, but there were several other developments as well. As mentioned above, President Trump’s administration imposed the steel and aluminum tariffs on all US trading partners. North Korea made headlines as well, as a high-ranking government official from North Korea came to the US last week and met with Secretary of State Mike Pompeo in New York City before flying to Washington DC to meet with President Trump in the White House. Following the conclusion of the meeting, President Trump said the June 12th summit was back on track and he was looking forward to working with Kim Jong Un. Global markets in general and Southeastern Asian markets in particular moved higher on the announcement on hopes that a deal may be worked out that ends the tense relationship the North Korean government has with the rest of the world.

 

In Europe last week, there were several major stories that impacted the markets. The Italian President made a full U-turn and asked the Five Star and League political parties to give forming a government one more try. This time, the two groups chose cabinet officials that were to the President’s liking and he rubber stamped his approval for the government. In the end, this was very positive for Italy as it means there will not be another snap election. It provides some political stability for a country that has seen 64 different governments take control since the end of World War Two. With the new populist anti-establishment government now seated in Italy, it remains to be seen how the government will address the mountain of outstanding government debt and various campaign promises. If history is any indication, this newly formed government will likely be short lived.

 

In Spain last week, Prime Minister Mariano Rajoy failed a confidence vote, leading to his resignation. The New Prime Minister Pedro Sanchez (a former economics professor), who heads up the Socialist party in Italy, must now try to find enough common ground in a political landscape of very few commonalities to stay in power. If PM Sanchez fails to do so, he too will face a vote of confidence and could potentially be removed from office.

 

China was the final contributor to major headlines over the past week as trade negotiations were held in Beijing between Secretary of Commerce Wilbur Ross and top Chinese officials. The talks were held at the end of last week and into the weekend. Given the lack of any formal statement from the White House until Monday morning, it can be assumed that the talks did not produce anything of note. China did release a statement late on Sunday following the talks, saying that if the proposed tariffs President Trump hinted at three weeks ago were to be imposed on China, all previous trade negotiations would be null and void, leaving the two countries starting all over again. The financial markets around the world seemed to view the latest round of threats from China over trade wars as a negotiating tactic. As this “negotiation” drags on, it becomes more likely that there will be a significant miscalculation and misstep by one of the two sides, which could cause the global markets to panic. Towards the end of the week, the focus of the global media shifted toward the upcoming G7 summit being held in Canada on June 8th and 9th. There will likely be some interesting headlines as trade policies are likely to be the main topic of discussion and President Trump will likely be the odd man out with the other countries present seemingly united against the idea of US trade barriers being enacted.

 

Hybrid model performance and update

For the trading week ending on 6/1/2018, 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 -0.02% -2.83% 4.89%
Aggressive Benchmark -0.12% 0.03% 6.19%
Growth Model -0.05% -2.22% 4.28%
Growth Benchmark -0.08% 0.19% 5.02%
Moderate Model -0.06% -1.80% 3.36%
Moderate Benchmark -0.05% 0.33% 3.80%
Income Model -0.09% -2.08% 2.83%
Income Benchmark -0.02% 0.45% 2.21%
Quant Model 2.12% -4.13%
S&P 500 0.49% 2.28% 10.13%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes made to the hybrid models over the course of the previous week. The models’ allocations in Small caps, Mid-caps and technology drove the overall performance for the week.

 

Market Statistics:

 

Index Change Volume
NASDAQ 1.62% Below Average
S&P 500 0.49% Below Average
Dow -0.48% Below Average

 

Facebook, Google and Tesla were the primary drivers of the NASDAQ performance last week as the index turned in the best performance of the three major US indexes. Volume remained below average across the board as last week was a holiday shortened trading week. The S&P 500 came in second last week with a gain of just under half a percent, while the Dow brought up the rear, giving up half a percent as GE, American Express and Walt Disney led the way lower.

 

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 2.88%   Utilities -0.88%
Residential Real Estate 2.67%   Regional Banks -0.94%
Energy 2.51%   Financial Services -1.02%
Technology 2.17%   Broker Dealers -1.13%
Biotechnology 2.12%   Financials -1.53%

 

We saw an interesting mix of sector performance last week as high risk Energy and Technology sectors were accompanied by Residential Real Estate on the top performing sectors list. Home builders saw unexpectedly strong performance with investors potentially doing some bargain shopping in a sector that had been beaten down over the past few months. On the negative side last week, the employment report combined with a continued lack of inflationary data put a dampener on the financial related sectors, while Utilities came under pressure from what now looks like a cruise control rising rate environment.

 

Compared to the movements in the fixed income markets that we have seen over the past month, the fixed income markets behaved in a more “normal” fashion last week. The full yield curve moved upward slightly as yields came down a little bit. The move in the overall yield curve was more of a shift lower than any flattening or steepening taking place.

 

Fixed Income Change
Long (20+ years) 0.80%
Middle (7-10 years) 0.23%
Short (less than 1 year) 0.02%
TIPS 0.32%

 

Best and Worst Currencies Change
US Dollar 0.00%
Indonesia rupiah 1.54%
Brazil real -2.43%

 

 

The US dollar saw some wild movements during the week last week, but ended the week exactly where it started the week. The best performing currency last week was found in Indonesia with the rupiah, which added 1.54 percent against the value of the US dollar, with the bulk of the move in the currency being due to the central bank of Indonesia raising interest rates for the second time in the past two weeks as it tries to prop up its falling currency. The worst performing currency globally was found in Brazil as the real declined by 2.43 percent. Corruption scandals last week continued to hit Brazil as the country’s largest company, Petrobras, saw the unexpected, quick resignation of its CEO as he is being investigated for corruption.

 

Commodities were mixed last week as Livestock and Copper were the sole gainers:

Metals Change   Commodity Change
Gold -0.58%   GS Commodity Index -1.19%
Silver -0.58%   Oil -3.14%
Copper 0.14%   Livestock 2.16%
      Grains -3.49%
      Agriculture -1.14%

 

The GS Commodity index posted a loss of 1.19 percent last week, as oil declined by 3.14 percent. Gold and Silver posted losses last week, each falling 0.58 percent. Copper bucked the trend and advanced by 0.14 percent. Soft commodities were mixed last week as Livestock advanced 2.16 percent, while Agriculture overall decreased by 1.14 percent and Grains declined 3.49 percent for the week.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Oslo Bors All Share Norway 2.27%   BIST 100 Turkey -3.90%
S & P BSE Sensex India 0.87%   Merval Argentina -4.14%

Last week was the second difficult week in a row in terms of international performance as only 15 percent of the indexes posted gains. Norway’s Oslo based Bors All Share index posted the strongest gain, advancing by 2.27 percent as foreign investors looked for countries that were largely immune to potential trade wars. The worst performance globally last week was found in Argentina for the second week in a row with the country’s Merval index declining by 4.14 percent.

Last week, on news that Italy was falling apart and its bonds were plummeting, the VIX made up for a wild day of trading on Monday everywhere, except for the US, by jumping almost 30 percent higher on Tuesday when the US started to trade. By the closing bell on Friday here in the US, fears had disappeared, leaving the VIX very close to where it had started the week, seeing a gain of only 1.82 percent. Last week was the second week in a row during which we saw a weekly move in the VIX of less than 2 percent, which is a rare occurrence. The VIX continues to be very complacent about what is going on in the world and largely ignoring or deeply discounting the chances that something does not turn out positive on the global stage. With the current VIX reading of 13.46, a move of 3.89 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week, the economic news releases were focused primarily on employment in the US. There was a single release that significantly beat expectations and none that significantly fell short:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 5/29/2018 Consumer Confidence May 2018 128.0 127.5
Slightly Negative 5/30/2018 GDP – Second Estimate Q1 2018 2.20% 2.30%
Neutral 5/31/2018 Personal Income April 2018 0.30% 0.30%
Positive 5/31/2018 Personal Spending April 2018 0.60% 0.30%
Neutral 5/31/2018 PCE Prices April 2018 0.20% 0.20%
Neutral 5/31/2018 PCE Prices – Core April 2018 0.20% 0.10%
Slightly Positive 5/31/2018 Chicago PMI May 2018 62.7 57.9
Slightly Positive 6/1/2018 Nonfarm Payrolls May 2018 223K 190K
Slightly Positive 6/1/2018 Nonfarm Private Payrolls May 2018 218K 177K
Neutral 6/1/2018 Unemployment Rate May 2018 3.80% 3.90%
Neutral 6/1/2018 Avg. Hourly Earnings May 2018 0.30% 0.30%
Neutral 6/1/2018 ISM Index May 2018 58.7 58.0

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

 

The second estimate of first quarter GDP released on Wednesday was the first release that the markets paid any attention to last week; it came in below expectations at 2.2 percent. The markets had been looking for 2.3 percent. With such a small downward revision, there were very few growth predictions for the full year that needed to be revised, but it did make hitting the ultimate GDP growth rate of 2.5 to 3 percent more difficult. Personal income and spending for the month of April were released on Thursday with a pleasant surprise coming from the personal spending figure as the growth came in double what was expected. Core PCE prices, also released on Thursday, had a minimal impact on the markets as it came in exactly as expected with a very small gain for the month. Friday was a busy day for economic news releases as all the standard employment related data for the month of May was released by the government. Both payroll figures surpassed market expectations, but it was the 18-year low reading of 3.8 percent on the overall unemployment rate that stole the headlines. As mentioned above, some of this decline was due to a drop in the labor force participation rate, but the markets seemed to rally on the unemployment rate nonetheless. One area of the employment releases on Friday that was a little disappointing was the wage growth figure, which came in very low, as expected.

 

It is a very slow week this week for economic news releases as there is only a single release on the calendar that has a chance at being noticed by the markets:

 

Date Release Release Range Market Expectation
6/5/2018 ISM Services May 2018 58.00

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

 

The lone release of potential significance this week is released on Tuesday and is the Services side of the ISM index that is expected to show a small increase during the month of May when compared to the April reading. There are no scheduled speeches by Federal Reserve officials.

 

Interesting Fact Thirst for Knowledge

 

There are more public libraries than McDonald’s or Starbucks in the U.S.—a total of 17,000, including branches.

 

Source: University of Southern California

For a PDF version of the below commentary please click here Weekly Letter 5-29-2018

Commentary quick take:

 

  • Major developments:
    • Markets moved higher in a choppy week
    • Korean summit is off, but may be back on
    • Oil hit all-time highs then plunged
    • Italy is a mess

 

  • US:
    • US bonds advanced
    • 10-year back under 3 percent yield
    • 1st Quarter Earnings Season
      • 96 percent complete
      • 78 percent of companies beating earnings estimates
      • 77 percent of companies beating revenue estimates
      • Blended earnings growth stands at 24.6 percent

 

  • Global:
    • Korean Summit is turning into a mess
    • Oil prices decline on Saudi comments
    • Italy falling apart
    • Spain confidence vote looming

 

  • Hybrid investments strategy update:
    • One change to hybrid strategies
    • Good performance last week
    • Positioned for volatility

 

  • This week for the markets:
    • Geopolitics

 

  • Interesting Fact: Voting in Italy

 

 

Major theme of the markets last week: On again, off again, on again

Going into a long holiday weekend last week, the markets had little economic data to focus on, but there was plenty of political drama, with most of it focused on the June 12th meeting between US President Trump and North Korean leader Kim. Starting early last week, President Trump seemed very nonchalant when asked questions about the potential upcoming meeting with Kim Jong Un. On Thursday, he dropped a bomb shell when he sent Kim a letter, officially withdrawing the US from the meeting. This was seemingly in response to North Korea officials calling members of the Trump administration “stupid,” mainly Vice President Pence. The global financial markets took this sharp turn of events negatively as everyone was left wondering if the “withdrawal” letter was merely a negotiating tactic or if President Trump was really pulling out of the meeting. Over the past extended weekend, President Trump warmed back up to a meeting taking place on June 12th in Singapore. Both sides have been talking to each other and North Korea is sending a high ranking general to New York this week to go over some of the planning details for the meeting. We will have to wait and see how the market reacts to the uncertainty over the upcoming meeting now that it looks to be back on track. This topic will likely remain in the media spotlight as it is a situation President Trump can directly control, unlike many of the other political situations involving him in Washington DC and New York.

 

US news impacting the financial markets:

 

Aside from the political noise coming out of Washington DC last week and the uncertainty over the meeting between the US and North Korea, the US financial media focused on the tail end of corporate earnings. It was a slow week for other meaningful news coming out of the US.

 

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:

 

AutoZone 3% Hewlett Packard 10% Splunk 22%
Best Buy 9% Intuit 3% Target -4%
Big Lots pushed Kohl’s 31% Tiffany 36%
Buckle 9% Lowe’s Companies -2% TJX Companies 11%
Foot Locker 16% Ross Stores 5% Toll Brothers 4%
Gap -7% Red Robin Gourmet Burgers -7% Williams-Sonoma 18%

 

Discount retailers continued to show the strength that had been building with previously announced results as Kohl’s, TJX and Ross all beat expectations. High end retailers, Tiffany and Williams-Sonoma, both turned in nice gains on increased foot traffic and high average ticket sales. Lowe’s missed expectations in much the same way that Home Depot missed two weeks ago, confirming that the weather had an adverse impact on the two major home repair stores in the US. Splunk handily beat market expectations as its cloud-based technologies continued to push growth.

 

According to Factset, we have seen 486 (97 percent) of the S&P 500 companies release results for the first quarter of 2018. Of the 486 companies that have released earnings, 78 percent have beaten earnings estimates, while 6 percent have met expectations and 17 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 77 percent of the companies have beaten estimates, while 23 percent have fallen short. Not surprisingly, given the significant increase in large cap technology names seen over the past few weeks, information technology as a sector was the top performing sector for the quarter when looking at both earnings and revenues. The overall blended earnings growth rate for the S&P 500 now stands at 24.6 percent, the highest reading since third quarter of 2010. Now that we are very close to the end of the reporting period, it is becoming increasingly unlikely that the figure shown above will materially change. Overall, the first quarter of 2018 has been shown to be very strong, but it looks increasingly unlikely that the markets will be able to repeat this strong performance in the subsequent quarters. So far there have been 100 companies that have issued forward guidance for the second quarter of 2018 with 57 issuing negative guidance while 43 have issued positive guidance.

 

This week is the last week for an earnings table for the first quarter of 2018 as the number of significant earnings reports after this week are nearly nonexistent. 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:

 

Burlington Stores Dollar General Guess
Costco Wholesale Dicks Sporting Goods HP
SalesForce.com Dollar Tree Ulta Salon

 

Salesforce, the most widely used CRM system in corporate America, will likely be the most followed earnings release this week as the company touches so many different businesses and industries. Costco, also a company that touches many businesses in the US, will report earnings that are expected to show a small increase in revenues and the bottom line as the company continues to push toward online sales. Discount retail stores make up the bulk of the releases this week as Burlington Stores, Dollar General and Dollar Tree all report earnings.

 

Global news impacting the markets:

 

Global news was very busy last week with many news making items impacting the overall global markets. Oil prices made many different headlines last week as the week started out with Brent crude topping and staying above $80 per barrel for the first time in three and a half years. However, the sky-high oil prices were short lived as a correction in oil prices occurred during the final three trading days of the week, lowering the price of Brent crude back under $75 per barrel by the end of the week. The decline in the price of oil was due to the announcement from Saudi Arabia that it was considering lifting the OPEC imposed production limits for the group. OPEC said it was due to concerns about high oil prices from its consumers, but it was confirmed by the White House that president Trump personally intervened, asking that OPEC do something to lower the increasing oil prices. This intervention could not have come at a better time as potential Iranian oil sanctions and the crumbling government in Venezuela (and with-it oil production) threatened to push global oil prices even higher. In just three days’ time, gone were the talks of oil potentially hitting $100 per barrel. They have been replaced with speculation about how low prices will go if several million barrels of oil are put onto the markets daily by Saudi Arabia and Russia. It was fascinating how fast the pundits in the financial media went from bull to bear on the price of oil.

In Europe, the situation in Italy and Spain look to be potentially more troublesome than any other political mess since the turmoil in Greece back in 2010. As mentioned in previous commentary, the political situation in Italy was in a precarious position as two politically extreme parties garnered enough votes in the last election to be allowed to try to form a coalition government. They successfully came to an agreement to run Italy. However, the plans hit a snag over the past weekend. The President of Italy, by law, must sign off on coalition governments and he decided not to sign off on the current coalition government because he disagreed with one of the proposed cabinet members, Paolo Savona (proposed to be the finance minister). Savona is a well-known Euro and Eurozone skeptic who would likely have actively tried to distance Italy from the European Union. Without the President’s backing, the coalition government attempt failed and new elections are being called for. The global markets are concerned that the new elections could yield an even more extreme outcome against the establishment in Italy that could ultimately lead to Italy trying to extract itself from the Europe Union. Unlike the Brexit, Italy leaving the union would likely spell the end of the EU as we currently know it, as it is the third largest economy and is far too indebted to make leaving an easy task. The interterm Prime Minister appointed by Italy’s President will have the unpleasant job of leading the government up to and through the elections, which could come as early as late August.  There are already calls for the President of Italy to be impeached for effectively killing the coalition government before it ever got going, but with the interterm PM in place, it seems unlikely that the President could be forced out of office.

Spain also made headlines last week as there was a successful call for a confidence vote in Spain on PM Rajoy’s government. The vote is scheduled to take place on Friday, June 1st and looks to be too close to call. This call for a confidence vote comes of the heels of 29 people within Rajoy’s political party being convicted of various crimes last week, including influence peddling and creating false documents. In May of 2017, PM Rajoy managed to survive a confidence vote by a narrow margin. If a vote of no confidence is made, the Spanish government will be dissolved, and snap elections will be called for once again in the country. If this were to occur, it will only add to the uncertainty in Europe and increase the fear of contagion moving well beyond Europe’s financial markets.

 

Hybrid model performance and update

For the trading week ending on 5/25/2018, 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 0.61% -2.81% 4.93%
Aggressive Benchmark -0.38% 0.15% 6.27%
Growth Model 0.39% -2.18% 4.32%
Growth Benchmark -0.30% 0.27% 5.07%
Moderate Model 0.17% -1.74% 3.40%
Moderate Benchmark -0.20% 0.38% 3.83%
Income Model 0.09% -1.99% 2.87%
Income Benchmark -0.09% 0.47% 2.23%
Quant Model 0.21% -6.12%
S&P 500 0.31% 1.78% 10.00%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There was only one change made to the hybrid models over the course of the previous week and that was adding a new position in PGHY (Powershares global short term high yield bond fund). The position was added in the lower risk models and is designed to be a position that generates a high yield (currently 5.24 percent) and should take advantage of any weakness that could be seen in the US dollar. Overall last week, the hybrid models performed very well considering the weakness seen in many of the global financial markets as investors started to come back to the more risk-off trades that had been out of favor so far during much of 2018.

 

Market Statistics:

 

Index Change Volume
NASDAQ 1.08% Average
S&P 500 0.31% Average
Dow 0.15% Average

 

All three of the major US indexes ended last week higher than where they started, despite the sinking feeling many investors were left with going into the long holiday weekend. Volume was average across the board when looking at the average weekly volume levels of the past year. It would not be surprising over the next few months if we see volume meaningfully lighten up to about 80 percent of average as summer trading volume is typically light.

 

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
Semiconductors 4.21%   Financials -1.28%
Residential Real Estate 3.12%   Materials -2.04%
Utilities 3.11%   Natural Resources -3.98%
Transportation 1.56%   Oil & Gas Exploration -5.04%
Home Construction 1.25%   Energy -5.51%

 

Semiconductors continued to bounce back last week, taking the top performing spot after many of the component companies in the sector saw gains of more than 4 percent. While this may sound great, the gains are coming on the back of declines of greater than 20 percent for 2018, so the performance is relative. Defensive sectors of the markets took the remaining four top performing spots as Real Estate, Utilities and Transportation made the list. Transportation was closely watched by investors as this sector is a good leading indicator of where the overall economy is headed. The gain in Transportation was directly a result of the falling oil prices, which were the primary driver of the negative performing sectors for the week. Energy as well as Oil and Gas Exploration, Natural Resources and Materials made up the worst performing sectors of the markets last week as oil prices came back down toward reality. Financials squeaked into the bottom performing list last week as rates declined here in the US for the first time in several weeks.

 

Last week in the US, fixed income jumped higher as global political fears forced many foreign investors into the safety of the US dollar and US debt markets. After briefly hitting a yield of 3.12 percent last week, the 10-year US bond advanced, causing the yield to decline to 2.93 percent. The move in the overall yield curve was more of a shift higher than any flattening or steepening taking place.

 

Fixed Income Change
Long (20+ years) 2.06%
Middle (7-10 years) 1.14%
Short (less than 1 year) 0.05%
TIPS 0.54%

 

Best and Worst Currencies Change
US Dollar 0.65%
Mexico peso 2.20%
Venezuela bolivar -12.45%

 

 

The US dollar made it two weeks in a row of gains, advancing by 0.65 percent last week as investors fled to the safety of the dollar. The best performing currency last week was found in Mexico with the peso, which added 2.20 percent against the value of the US dollar, as Mexico has largely stayed out of the geopolitical mess that many other countries around the world have been pulled into. The worst performing currency globally was found in Venezuela as the bolivar declined by 12.45 percent. Until there is a political shift in Venezuela, it will be a wild ride for both the bolivar and the country’s stock market.

 

Commodities were mixed last week as precious metals advanced, while oil declined:

Metals Change   Commodity Change
Gold 0.65%   GS Commodity Index -1.45%
Silver 0.32%   Oil -5.20%
Copper 0.84%   Livestock 2.66%
      Grains 3.77%
      Agriculture 2.60%

 

The GS Commodity index posted a loss of 1.45 percent last week, as oil was the only negative performer of all the major commodities. Oil declined 5.2 percent during the week as Brent crude oil came crashing downward at the end of the week on the surprise production comments coming out of Saudi Arabia. Gold, Silver and Copper all posted gains last week, advancing by 0.65, 0.32 and 0.84 percent, respectively. Soft commodities were positive last week as Livestock advanced 2.66 percent, while Agriculture overall increased by 2.60 percent and Grains jumped 3.77 percent for the week.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Jakarta Composite Indonesia 3.33%   Sao Paulo Bovespa Brazil -5.04%
Weighted Taiwan 1.03%   Merval Argentina -6.92%

Last week was a difficult week in terms of international performance as only 18 percent of the indexes posted gains. Indonesia’s Jakarta Composite index was on top of the gainers list with a gain of 3.33 percent last week. The worst performance globally last week was found in Argentina with the country’s Merval index declining by 6.92 percent. Italy gets a dishonorable mention this week in the country performance as its main stock index, the FTSE MIIB, declined by 4.48 percent, driven primarily by losses seen in the financial sector.

While the markets felt like last week was a wild ride, the VIX was not. It declined by 1.49 percent for the week, ending the week just over 13. The VIX continues to be very complacent about what is going on in the world as it seems to be largely ignoring or deeply discounting the chances that something does not turn out positive on the global stage. With the current VIX reading of 13.22, a move of 3.82 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week, the economic news releases were focused primarily on the Fed and durable goods orders. There were no releases that significantly beat or missed expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 5/23/2018 New Home Sales April 2018 662K 700K
Neutral 5/23/2018 FOMC Minutes May 2018 N/A N/A
Neutral 5/24/2018 Existing Home Sales April 2018 5.46M 5.64M
Neutral 5/25/2018 Durable Orders April 2018 -1.7% -1.8%
Slightly Positive 5/25/2018 Durable Goods –ex transportation April 2018 0.9% 0.5%
Neutral 5/25/2018 University of Michigan Consumer Sentiment Index May 2018 98.0 98.9

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

 

The FOMC meeting minutes were the first of the economic data releases that the market took any notice of last week and they held no meaningful new information. Following the release of the minutes, there were no changes in the markets’ expectations of future rate hikes in either 2018 or 2019. On Friday, durable goods orders posted a decline, as was expected by the markets, leading to a limited impact on the overall markets, which were much more focused on the happenings in Italy. The University of Michigan index data was released later during the day on Friday, but by that point most of the traders had started their extended weekend early and there was no impact seen on the markets.

 

This week is an important week for economic news releases as the second estimate of GDP and the employment data for May are set to be released. Releases that have the most potential to impact the overall markets this week are highlighted in green:

 

Date Release Release Range Market Expectation
5/29/2018 Consumer Confidence May 2018 127.5
5/30/2018 GDP – Second Estimate Q1 2018 2.30%
5/31/2018 Personal Income April 2018 0.30%
5/31/2018 Personal Spending April 2018 0.30%
5/31/2018 PCE Prices April 2018 0.20%
5/31/2018 PCE Prices – Core April 2018 0.10%
5/31/2018 Chicago PMI May 2018 57.9
6/1/2018 Nonfarm Payrolls May 2018 190K
6/1/2018 Nonfarm Private Payrolls May 2018 177K
6/1/2018 Unemployment Rate May 2018 3.90%
6/1/2018 Avg. Hourly Earnings May 2018 0.30%
6/1/2018 ISM Index May 2018 58

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

 

The second estimate of first quarter GDP released on Wednesday is the first release the markets will be paying close attention to this week. Expectations are for no change over the 2.3 reading that we saw on the first estimate. Typically, the second estimate sees a pretty big change from the first estimate as previously used data is updated with “better” data. If we see a significant change from the 2.3 percent, we will likely see a meaningful market reaction. Personal income and spending for the month of April are set to be released on Thursday. With this data be so stale, it is unlikely that either will move the markets unless we see an unexpectedly low reading. Core PCE prices, also released on Thursday, could have an impact on the overall markets as this is the government’s preferred reading of inflation when looking at the inflation component of the interest rate decisions. Friday is a busy day for economic news releases as all the standard employment related data for the month of May is released by the government. Improvements are expected to be seen in the payroll figures as April was a bit of a disappointment. The overall unemployment rate is expected to be unchanged at 3.9 percent, like it was in April. The markets will also be paying close attention to the average hourly earnings reported on Friday as they are expected to post a solid gain of 0.3 percent after a low reading of only 0.1 percent in April. Wage inflation could produce reason enough for the Fed to keep raising interest rates to head off inflation that remains stubbornly low around the world in almost all developed economies.

 

Interesting Fact Voting in Italy

 

All Italian citizens aged over 18 can vote for members of the Chamber of Deputies. When it comes to Senate elections, however, the voting age rises to 25.

 

This anomaly has been criticized as one of the reasons Italy’s legislation is seen as skewered towards protecting the older generation.

 

Source: www.thelocal.it

For a PDF version of the below commentary please click here Weekly Letter 5-21-2018

Commentary quick take:

 

  • Major developments:
    • Markets moved lower as yields in the US hit highs
    • Italy turning into a mess
    • Trade war potentially averted?
    • Oil topped $80 per barrel

 

  • US:
    • US bonds declined
    • 10-year hit a yield of 3.12 percent
    • 1st Quarter Earnings Season
      • 93 percent complete
      • 78 percent of companies beating earnings estimates
      • 77 percent of companies beating revenue estimates
      • Blended earnings growth stands at 24.5 percent

 

  • Global:
    • Italian politics are a risk to the EU
    • Will ECB forgive €250 billion in debt to Italy? —Yea right
    • North Korea talking a big game
    • Trade war with China on hold

 

  • Hybrid investments strategy update:
    • Several changes to the hybrid models
    • Rising rate focused investments

 

  • This week for the markets:
    • Geopolitics

 

  • Interesting Fact: How much money is in circulation?

 

Special note this week: With the summer trading season starting next week, I will be changing formats of weekly commentary to a more consolidated version as news and impactful events lessen during the summer.

 

Major theme of the markets last week: 10-year US bonds hit yield of 3.12 percent

 

With last week being a slow week for both earnings and other news out of the US, the markets focused on the movement of the US 10-year bond, which has been moving up very steadily since the start of the year, as depicted in the chart above. While there were several weeks back in late February and early March that we saw yield moving toward 3 percent, it is only recently that we have seen the three percent barrier meaningfully broken. Last week the yield topped out at 3.12 percent, but for the most part the markets seemed to pay little attention to the new highs. At the start of the year, many economists and financial pundits were saying that a 3 percent yield on the 10-year would be a market killer, but those goal posts have now been moved by these same people to 4 percent. This change is leaving many investors wondering just how high rates would need to be to have an adverse impact on the markets.

 

US news impacting the financial markets:

 

Last week felt like a summer trading week as the news flow was slow and market reactions even slower. Geopolitics came into play last week with much speculation in the US over the situation with Iran, North Korea and a potential trade war, with members of the administration sending out mixed messages. More on these situations in the global news section below. With little else going on in the US financial media last week, investors turned their eyes toward the dwindling list of companies that reported corporate earnings.

 

Last week was a slow week for companies reporting earnings as we moved very quickly toward the end of the reporting season. 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:

 

Campbell Soup 17% The Home Depot 1% Walmart 2%
Cisco Systems 2% Nordstrom 21%
Deere & Company -6% Macy’s 33%

 

Walmart made the biggest headlines last week, as expected, when the company reported its earnings results, which were in-line or slightly better than analysts had expected on most of the metrics evaluated. Margins was one area of concern as they were seen compressing by 0.3 percent during the quarter. Online retail sales growth disappointed after posting a gain of only 33 percent, while many analysts had been expecting growth of 40 percent during the quarter. Walmart stock declined on the day following its earnings announcement. Home Depot also had a pretty good quarter, but fell short of lofty expectations on a few key metrics during the quarter. Same store sales increased by 4 percent, which was slightly lower than the street had been expecting. Home Depot called out the atypically cooler weather during the first quarter as the reason for the soft sales as the garden division of the company saw excessive weakness. Campbell Soup on Friday handily beat market expectations when looking at both revenues and earnings, but lowered its overall guidance for 2018. The primary reason for the lowered guidance was the increasing costs of raw materials, in particular the cost of cans as the tariffs imposed by the US have had a negative impact on the company. Retailers Nordstrom and Macy’s both turned in solid quarters as US consumer continued to shop and spend money despite the lackluster readings that were seen during the quarter in the retail sales figures.

 

According to Factset, we have seen 466 (93 percent) of the S&P 500 companies release results for the first quarter of 2018. Of the 466 companies that have released earnings, 78 percent have beaten earnings estimates, while 6 percent have met expectations and 16 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 77 percent of the companies have beaten estimates, while 23 percent have fallen short. Not surprisingly, given the significant increase in large cap technology names seen over the past few weeks, information technology as a sector was the top performing sector for the quarter when looking at both earnings and revenues. The overall blended earnings growth rate for the S&P 500 now stands at 24.5 percent, the highest reading since third quarter of 2010. Now that we are very close to the end of the reporting period, it is becoming increasingly unlikely that the figure shown above will materially change. Overall, the first quarter of 2018 has been shown to be very strong and has left many investors hoping the strong results will lead to the markets continuing to push higher.

 

This week, most of the earnings reports will focus on retailers as both high and lower end retailers report 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:

 

AutoZone Gap Splunk
Best Buy Hewlett Packard Target
Big Lots Intuit Tiffany
Buckle Kohl’s TJX Companies
Burlington Stores Lowe’s Companies T-Mobile
Foot Locker Ross Stores Toll Brothers
Guess Red Robin Gourmet Burgers Williams-Sonoma

 

After Walmart posted good results last week, Target will be under the microscope to see if the company is keeping pace or falling further behind. Discount retailers such as Ross, TJ Maxx, Kohl’s and Burlington Stores all report results this week and if other retailers that have reported are any indication, we will likely see a very mixed bag of results with weather being blamed for any poor performance. Higher end retailers Best Buy and Tiffany will likely post strong results as higher end shopping for the quarter was strong. Best Buy always has the problem of trying to draw in younger shoppers who mostly shop online; any guidance that the company is achieving significant traction with younger shoppers will likely drive the stock higher. With Home Depot’s results disappointing Wall Street, Lowe’s will be watched to see if it was an industry-wide event or just problems with Home Depot.

 

Global news impacting the markets:

 

Geopolitics was the primary focus of the global news that impacted the financial markets last week. Some of the biggest news last week came out of Italy as the 5-star movement agreed to form a coalition government with the League political party. Both 5-star and League are both anti-EU political parties and their coming to power and controlling the Italian government was almost unthinkable prior to the elections that took place back in early March. You may remember that Italy is a heavily indebted country and one of the pillars of the European Union. Back when Brexit was first gaining steam, Italy was called out as the second most likely country to try to withdraw from the EU. That potential is becoming very real as the new government in Italy is calling for increased government spending, lower taxes and rolling back the pension reforms that were undertaken to secure loans from the ECB. The loans from the ECB are also on the table now with the new political powers calling for the ECB to forgive as much as €250 billion in debt to Italy. The ECB has said it would not even consider such actions, leaving the borrower in a bit of a precarious position with their lender. The Euro dropped for its fifth straight week in a row as investors fled toward the Swiss franc and US dollar.

 

North Korea was second on the list of geopolitics that impacted the financial markets last week as there were continued threats of North Korea pulling out of a planned summit in Singapore between US President Trump and Mr. Kim. The global financial markets took this development in stride and understood the rhetoric to be nothing more than political posturing and negotiations prior to the meeting being held. Global markets, as seen by recent movements in the price of Brent crude oil, seem to be more concerned about the Iranian nuclear deal than the situation in North Korea. This concern is justified as global oil markets have the potential to hit the global economy much more severely than anything North Korea could muster. Last week, Brent crude oil hit $80 per barrel and prices at the pumps here in the US topped out over $3 per gallon for gasoline on average. This comes as the more expensive blends of gasoline are in full production for the peak summer driving months and as prices at the pump are beginning to have an impact on consumer spending. One thing to keep in mind is that incumbent political parties tend to not do very well in elections, midterm or primary elections, if gas prices at the pump are significantly higher than when they came into control.

 

Global trade was the final significant topic of the global media last week as NAFTA negotiations appeared to be making progress and then looked to be no better off than when they started. The potential trade war between the US and China looks to be put on hold if China agrees with what Treasury Secretary Steve Mnuchin said on Sunday, that both sides are willing to make the changes needed to avoid a trade war. While this sounds like a positive development,  the markets are likely to remain skeptical as this would not be the first time the US has said things were going well with the trade negotiations, only to have China directly contradict those statements.

 

Hybrid model performance and update

For the trading week ending on 5/18/2018, 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 -0.27% -3.40% 4.74%
Aggressive Benchmark -0.66% 0.54% 6.46%
Growth Model -0.34% -2.56% 4.21%
Growth Benchmark -0.50% 0.57% 5.22%
Moderate Model -0.43% -1.91% 3.37%
Moderate Benchmark -0.36% 0.58% 3.93%
Income Model -0.53% -2.08% 2.86%
Income Benchmark -0.16% 0.56% 2.28%
Quant Model -0.70% -6.32%
S&P 500 -0.54% 1.47% 9.96%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings, the hypothetical models are rebalanced daily to model targets and do include dividends being reinvested. Performance calculations are my own.

 

There were several changes to the hybrid models over the course of the previous week. The changes were adding to existing positions in both the John Handcock Multifactor Technology ETF (JHMT) and adding to the Robotics and Artificial intelligence ETF (BOTZ). Both positions are technology focused funds that have a negative correlation to the individual stock baskets that make up the foundation of the hybrid models. During the week last week, many of the rising rate focused holdings (RRPIX, RTPIX, FLRN and SRLN) of the hybrid models performed well as the 10-year bond hit a yield of 3.12 percent. Overall, the hybrid models are more invested currently than at any other time during 2018, but they remain invested with an eye toward protecting against potential downdrafts in the financial markets.

 

Market Statistics:

 

Index Change Volume
Dow -0.47% Average
S&P 500 -0.54% Average
NASDAQ -0.66% Average

 

Last week was an uneventful week when looking at the volume on all three of the major US indexes. While overall there was a little pull back, the strong upward move that started a week and a half ago remains intact. One index that is not listed above, but deserves an honorable mention, is the Russell 2000 small cap index, which last week made a new all-time high on several different days and is the first of the US indexes that has managed to break out to a new high during the recent rally.

 

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 3.68%   Technology -1.60%
Energy 2.02%   Infrastructure -2.52%
Healthcare Providers 1.85%   Utilities -2.73%
Basic Materials 1.78%   Telecommunications -2.92%
Pharmaceuticals 1.60%   Real Estate -3.87%

 

With oil prices continuing to climb last week, it was not surprising to see that Oil and Gas Exploration and Energy took the top two spots in terms of sector performance, each gaining more than 2 percent. Healthcare Providers came in third and the related Pharmaceuticals sector took the fifth spot after it now looks like the administration will not be able, or even try, to make any major changes in the current US healthcare system. The fourth spot last week, helped in large part by oil, was Basic Materials. On the negative side last week, Real Estate turned in the worst performance as home builders once again were hit hard over worries about future home prices in a rising mortgage rate environment. Telecommunications continues to swing around wildly on fears of the government getting more involved in some of the proposed mergers that have been announced. Utilities were hit by 2.7 percent last week as the rising US 10-year hitting 3.1 percent had a meaningful negative impact on the defensive sector that is perhaps the most interest rate sensitive. Infrastructure and Technology overall rounded out the bottom five performing sectors for the week last week.

 

Last week in the US fixed income market there was a well-defined flattening of the yield curve as the long end of the curve declined, while the short end increased. In the middle, the 10-year US bond declined enough for the yield on the bond to touch 3.12 percent, the highest level that we have seen in several years.

 

Fixed Income Change
Long (20+ years) -1.69%
Middle (7-10 years) -0.65%
Short (less than 1 year) 0.03%
TIPS -0.63%

 

Best and Worst Currencies Change
US Dollar 1.32%
Switzerland franc 0.27%
Uruguay peso -5.77%

 

 

After falling slightly two weeks ago, the US dollar came roaring back last week, advancing by 1.32 percent against a basket of international currencies. The best performing currency last week was found in Switzerland with the franc, as the currency added 0.27 percent against the value of the US dollar, as fears over what could happen in Italy from a political standpoint seemed to boost the value of the franc. The worst performing currency globally was found in Uruguay as the peso declined by 5.77 percent. Latin America has seen a string of large movement in currencies as the local emerging market economies (almost all Latin American countries are considered emerging markets) are some of the most at risk to the rising US dollar.

 

Commodities were mixed last week as precious metals declined, while oil advanced:

Metals Change   Commodity Change
Gold -2.07%   GS Commodity Index 1.12%
Silver -1.40%   Oil 1.26%
Copper -1.60%   Livestock -3.36%
      Grains 1.52%
      Agriculture -0.42%

 

The GS Commodity index posted a gain of 1.12 percent last week, as oil helped to boost the overall return. Oil advanced 1.26 percent during the week as Brent crude oil moved above the $80 per barrel level for the first time in several years. Gold, Silver and Copper all posted losses last week, declining by 2.07, 1.4 and 1.6 percent, respectively. Soft commodities were mixed last week as Livestock declined 3.36 percent, while Agriculture overall decreased by 0.42 percent and Grains bucked the trend by gaining 1.52 percent.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Merval Argentina 6.76%   FTSE MIB Italy -2.94%
Tel Aviv Israel 3.00%   WIG Poland -3.36%

Last week was a mixed week in terms of international performance as 48 percent of indexes posted gains. Argentina’s Merval index made it two weeks in a row at the top of the gainers list with a gain of 6.76 percent last week.  All the recent movement stems from the government’s stepping in and trying to reign in inflation by hiking its federal funds rate to 40 percent. While the gains of the past two weeks in Argentina may look impressive, the country is still a significant way away from being a stable emerging market economy. The worst performance globally last week was found in Poland with the country’s WIG index declining by 3.36 percent.

The consecutive weeks of declines for the VIX came to an end last week at five as the VIX gained 6.09 percent last week. As mentioned last week, we saw the VIX break below 13 two weeks ago, but last week the number proved too difficult to remain below as the fear gauge moved back above 13 to close out the week at 13.42. With the current VIX reading of 13.42, a move of 3.87 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week, the economic news releases were focused primarily on retail sales. Releases that significantly beat or missed expectations are highlighted in green below:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 5/15/2018 Retail Sales April 2018 0.3% 0.3%
Slightly Negative 5/15/2018 Retail Sales ex-auto April 2018 0.3% 0.5%
Positive 5/15/2018 Empire Manufacturing May 2018 20.1 15.0
Slightly Negative 5/16/2018 Housing Starts April 2018 1287K 1325K
Neutral 5/16/2018 Building Permits April 2018 1352K 1350K
Positive 5/17/2018 Philadelphia Fed May 2018 34.4 20.0

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

 

Last week, the economic news releases started on Tuesday with the release of the retail sales figure for the month of April, which came in at market expectations when looking at the overall retail sales figure and slightly below expectations when looking at retail sales excluding auto sales. With the retail sales growth rate being about half of what was seen in March, some economists are pointing toward potential future issues with economic growth as the US consumer seems to be taking a step back in their purchasing. Later during the day on Tuesday, the Empire manufacturing index for the month of May was released and handedly beat market expectations by more than 30 percent as manufacturing in the greater New York area saw a strong pickup during the month. On Wednesday, the housing starts and building permit figures for the month of April posted mixed results as housing starts missed expectations and building permits came in in-line with expectations. Wrapping up the week last week was the release of the Philadelphia Fed index for the month of May, which, much like the Empire manufacturing index released earlier during the week, far exceeded market expectations as business conditions and manufacturing output both unexpectedly jumped higher, despite the rising cost of fuel.

 

This week is a slightly below average week in terms of the numbers of economic news releases with the focus of the releases being on the FOMC meeting minutes. Releases that have the most potential to impact the overall markets this week are highlighted in green:

 

Date Release Release Range Market Expectation
5/23/2018 New Home Sales April 2018 700K
5/23/2018 FOMC Minutes May 2018 N/A
5/24/2018 Existing Home Sales April 2018 5.64M
5/25/2018 Durable Orders April 2018 -1.8%
5/25/2018 Durable Goods –ex transportation April 2018 0.5%
5/25/2018 University of Michigan Consumer Sentiment Index May 2018 98.9

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

 

This week, the economic news releases start on Wednesday with the release of the new home sales figure for the month of April, which is expected to post a slight improvement over the 694,000 units sold in March. The bigger release of the day on Wednesday will be the release of the FOMC meeting minutes from the May meeting. It is unlikely that there will be new information in the meeting minutes, but the minutes will provide a glimpse into the different thinking of Fed officials as it relates to the timing of future rate hikes. One thing the markets will be closely looking for in the minutes will be any discussion about the price of oil increasing and the potential impact it could have on inflation in the US. On Thursday, the existing home sales figure for the month of April is set to be released and will provide the final significant data point about the US housing market for the month. Overall, the data that has been released so far seems to point toward a slow, but steadily increasing US housing market. On Friday the durable goods orders figures, both including and excluding transportation, are set to be released with poor overall expectations. Overall durable goods orders are expected to post a decline of 1.8 percent during April, this compared to a gain of 2.6 percent that was seen in March. Much, if not all, of this difference can be attributed to the sale of airplanes during the month. With transportation taken out of the equation, expectations are for durable goods to have increased 0.5 percent compared to a zero in March, which would be a nice improvement, but also seems like a lofty goal. This week wraps up on Friday with the release of the University of Michigan’s consumer Sentiment Index for the month of May (middle of the month reading), which is expected to show no change over the end of April reading. As is normally the case, Fed Chair Powell will speak on Friday about economic policy in the US, as the Fed chairperson normally speaks on the Friday before the Memorial Day weekend so that Wall Street can’t just skip out early for the long weekend.

 

Interesting Fact How much money is in circulation?

 

According to the Bank of International Settlements, there is about $5 trillion in notes and coins in circulation around the world. The US portion of the total is about $1.5 trillion. With the most recent census numbers showing 325 million people living in the US, if that $1.5 trillion was all held by people living in the US, each person would have about $4,600.

 

Source: www.marketplace.org

For a PDF version of the below commentary please click here Weekly Letter 5-14-2018

Commentary quick take:

 

  • Major developments:
    • Markets marched higher, driven by Apple
    • Apple closing in on $1 trillion valuation
    • US withdraws from Iranian nuclear deal
    • Meeting set with North Korea

 

  • US:
    • 1st Quarter Earnings Season
      • 91 percent complete
      • 78 percent of companies beating earnings estimates
      • 77 percent of companies beating revenue estimates
      • Blended earnings growth stands at 24.9 percent
    • No more rate hikes in 2018?

 

  • Global:
    • President Trump withdraw from Iranian deal
    • No actions taken by central banks
    • Oil prices higher

 

  • Hybrid investments strategy update:
    • Several changes to the hybrid models

 

  • This week for the markets:
    • Uncertainty of Iran
    • Walmart earnings
    • Build up for Korean Summit

 

  • Interesting Fact: Just how big is Apple?

 

Major theme of the markets last week: When will Apple hit $1 trillion market cap?

Last week was a slow week for economic and market moving events so, as is typically the case, the media picked one theme and ran with it for the entire week. The theme picked last week was Apple and the company’s race toward a $1 trillion market cap. Apple has been on a tear since April 27th when the company announced earnings that beat expectations and did not show a significant slowdown in any of its business lines. Combine those results with the news that Warren Buffett added significantly to his ownership in Apple (he now owns roughly 5 percent of the company) and you have the recipe for multiple new all-time highs in rapid succession. This is what happened last week as Apple made a new all-time high four of the five days and extended its run of positive days to nine. Ultimately, the run came to an end on Friday as the stock declined by three quarters of a percent. With each new all time high set last week, Apple inched closer to the elusive $1 trillion-dollar market cap, something that has not been done before. As of Friday’s close, the stock was about $14 away from hitting this mark and will likely make a good run at the history books at some point this week. The delight with the movement of Apple was cheered by investors as the company has significant weighting in all of the major indexes that it is a component of and the stock can singlehandedly drive the overall performance of the markets, as has been the case for the past two weeks.

 

 

 

 

 

US news impacting the financial markets:

 

It was a slow week for US news impacting the overall markets with most of the significant developments involving the US having to do more with international news that domestic. With a general lack of news, earnings season once again remained in the spotlight as pundits in the media debated the earnings season we have seen so far and what it could mean for the markets if we have already seen peak earnings for this economy cycle.

 

Last week saw a significant decrease in the number of companies reporting first quarter 2018 earnings, when compared to two weeks ago. 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:

 

ADT -119% Hertz Global -23% Papa John’s International -19%
Anheuser-Busch -8% JD.com -27% Rambus 0%
CenturyLink 67% KAR Auction 11% ROKU 56%
Walt Disney 10% La Quinta -600% Toyota Motor 15%
Electronic Arts 14% Marriott International 7% Tyson Foods -4%
Etsy 100% Meredith 80% Hostess Brands -7%
Twenty-First Century Fox -6% Maximus -2% Wendy’s Arby’s 10%
Groupon Nvidia 24% Aqua America 0%
Hain Celestial Group -21% Office Depot 0% Yelp 67%
Henry Schein 3% Occidental Petroleum 30% Zillow Group 17%

 

There is an oddity in the table above from last week’s earnings results and that is an infinite beat by Groupon. While this may sound like a wonderful thing, it is just an issue with calculating a percentage beat when expectations were for a zero earnings report and the company turned in $0.03 earnings per share for the quarter. Online technology companies had a good week of reporting even if they were not all infinitely better than was expected. Yelp, Etsy, Zillow and ROKU all turned in beats of more than 17 percent with Etsy topping out the list at a 100% beat of expectations. On the downside last week, La Quinta had a tough showing, missing expectations by 600 percent as lower end hotels chains have really been feeling the pinch of Airbnb and other hotel-like accommodations hitting their bottom line. The same can be said for Hertz Global as the rental car business looks to be headed for problems as the prevalence of ride sharing companies such as Uber and Lyft continue to push business travelers away from renting cars while on business trips, especially to some of the larger cities in the US. ADT was another company that technology seems to be leapfrogging as Simple Safe Home security systems has been noticeably taking market share from the company. Most of the above-mentioned earnings have a central theme around them, that being technology advancing and disrupting the way business has been done. This is a trend that will likely not be changing any time soon.

 

According to Factset, we have seen 455 (91 percent) of the S&P 500 companies release results for the first quarter of 2018. Of the 455 companies that have released earnings, 78 percent have beaten earnings estimates, while 6 percent have met expectations and 17 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 77 percent of the companies have beaten estimates, while 23 percent have fallen short. The overall blended earnings growth rate for the S&P 500 now stands at 24.9 percent, the highest reading since third quarter of 2010. As we get closer to the end of the year, it becomes increasingly unlikely that the above figure for the quarterly results will materially change.

 

This week is the sixth week of earnings reporting for the first quarter of 2018. The “cliff,” in terms of the number of companies reporting earnings is upon us. 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:

Campbell Soup Dick’s Sporting Goods Macy’s
Cisco Systems The Home Depot T-Mobile
Deere & Company Nordstrom Walmart

 

Walmart will take most of the earnings news headlines this week as it is the largest retail company in the US and its earnings reports normally impact many different industries. With the US housing market continuing to climb, Home Depot will likely turn in a strong quarter this week as the two frequently move in tandem. With consumer staples having been under pressure for several months, Campbell Soup will have more investors watching its results than usual this week as everyone waits to see what, if any, impact generic brand competition and raw material input costs have had on the company’s bottom line.

 

One interesting thing happened last week that the markets seemed to ignore or give no credit to whatsoever. On Friday, St. Louis Federal Reserve Bank President James Bullard gave an interesting speech in which he claimed the current interest rate set by the FOMC is near the neutral rate and that no further interest rate hikes should be needed during 2018. Obviously, he is in the minority at the Fed in this line of thinking as the markets are still pricing in two or three more rates hikes in 2018 based on what has been released by the Fed. However, if Bullard is correct and the Fed does not need to raise rates further, it could be a big lift for the markets as the punch bowl of low rates would be here to stay for longer than currently thought. The markets will be listening more closely than normal to the Fed officials speaking this week (there are 11 speeches) to see if Mr. Bullard‘s assessment resonates with other Fed officials.

 

Global news impacting the markets:

 

Global news last week was busy with several events that impacted the overall markets. The most impactful news event of the week was US President Trump’s decision and announcement to withdraw the US from the Iranian nuclear deal. After attacking the deal during his campaign, he finally followed through on his threats and ended the deal. As with most actions taken by President Trump, he left the door open just enough for negotiations to continue on the topic. By delaying most of the sanctions from kicking into effect immediately, especially the oil sanctions (which were delayed for 180 days), there is still time for Tehran and the US to come to an agreement about the future of the nuclear program in Iran before the country starts to feel the pinch of sanctions on its oil exports. However, it is unknown if sanctions being reapplied to Iran would even work as the EU as well as Russia, China and others have said they are sticking with the Iranian nuclear deal even if the US backs out. If the US imposed oil sanctions, the big question becomes who will abide by the sanctions and who will actively work against them to keep oil flowing from the country. While the announcement by President Trump initially caused some oil traders to push prices lower on the delay of sanctions, oil ultimately moved higher for the week, adding to many investors’ already bullish feelings toward the commodity.

 

Another major theme in the international financial media last week was North Korea as leader Kim Jong Un met with several world leaders last week and assured the world that he was willing to give up his nuclear ambitions. Additionally, Mr. Kim met with US Secretary of State Mike Pompeo as he secured the release of the three remaining US prisoners within the country. Following the release of the prisoners, President Trump tweeted that the upcoming summit between the two world leaders would be held in Singapore on June 12th. Everyone seems to be in jovial spirits about the prospects of the meeting, but it remains to be seen what Mr. Kim’s aim is for holding the meeting at the current time. In the past, meetings have been held and agreements have been made, yet the North Koreans have had no problem breaking those agreements. Ironically the deals that have been broken by the North Koreans are strikingly similar to the deal the US just broke with Iran, only with the roles reversed. We have come a long way from the fire and fury threats of President Trump just a few short months ago regarding North Korea. The global financial markets have applauded the efforts, but a deal still needs to be reached and abided by for the markets to really breathe a sigh of relief on the topic.

 

There were several central bank meetings that took place with the outcomes from all the meetings being the same with no changes in any of the underlying rates. The Bank of England was perhaps the most interesting of the meetings as the board of governors saw more dissent than has been seen in the past, causing investors to wonder if the hawkish stance of the bank could be coming to an end sooner rather than later. One central theme seen across the meetings held last week is the fact that global growth is slow and not picking up the pace, while at the same time inflation remains slow in most markets aside from a few select emerging markets, causing central bankers to be in a bit of a quagmire as to what they should be doing with their policies going forward.

 

Hybrid model performance and update

For the trading week ending on 5/11/2018, 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 0.40% -3.14% 4.87%
Aggressive Benchmark 1.88% 1.20% 6.75%
Growth Model 0.24% -2.23% 4.37%
Growth Benchmark 1.47% 1.08% 5.44%
Moderate Model 0.08% -1.49% 3.55%
Moderate Benchmark 1.06% 0.94% 4.09%
Income Model -0.02% -1.56% 3.08%
Income Benchmark 0.54% 0.72% 2.35%
Quant Model 0.17% -5.66%
S&P 500 2.41% 2.52% 10.42%

*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 past week as the models were investing cash that had been waiting on the sidelines. The first change was the addition of funds to the floating rate ETF ticker FLRN. This ETF is a short duration bond fund that focuses on investing in floating rate bonds. Historically, floating rate bonds are some of the fastest bonds to adjust to rising interest rates given they do not take on the full duration of the bond market. The current yield of the fund is 2.15 percent and the volatility of the fund has historically been less than the volatility of the equity and broad bond markets.

 

 

Market Statistics:

 

Index Change Volume
NASDAQ 2.68% Below Average
S&P 500 2.41% Average
Dow 2.34% Below Average

 

Last week saw the robust performance of the three main indexes continue. Volume remained elusive during the week across nearly all sectors of the markets. The one exception to low volume was large cap technology, which of course was being driven by Apple’s chase to a trillion-dollar valuation.

 

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
Aerospace & Defense 4.35%   Telecommunications 0.40%
Semiconductors 4.22%   Consumer Staples 0.06%
Biotechnology 4.13%   Infrastructure 0.05%
Financial Services 4.10%   Home Construction -0.46%
Energy 3.95%   Utilities -2.04%

 

With President Trump’s withdrawal from the Iranian nuclear deal early last week and the increasing violence in the region, the Aerospace and Defense sector took top honors, gaining 4.35 percent for the week. Nasdaq heavy Semiconductors and Biotechnology took second and third places last week as indexes that track the technology sector were forced to buy shares in the sector to keep in balance with the overall indexes. Financial Services came in fourth with a return of just over 4 percent, while Energy took the fifth and final spot on the list last week, gaining nearly 4 percent after oil prices pushed higher for the week around the world on the Middle Eastern tension. Defensive sectors of the markets last week were the underperformers, as one would have expected in such a strong market move driven by technology. Utilities and Home Construction were the only two major sectors of the markets to turn in negative performance as both seemed to come under interest rate pressure.  Infrastructure took a bit of a hit last week following the outcome of the primary elections that were held in several states last week and the uncertainty over which party will control which parts of Congress come November. Consumer Staples and Telecommunications rounded out the bottom five performing sectors last week as both are defensive in nature and were sold as investors favored higher risk technology focused investments.

 

Last week saw some very interesting movements in the US fixed income market as the short and long end of the market increased in value while the middle of the curve declined meaningfully. This movement came on the back of inflation related data that was released throughout the week, which pointed toward continued low levels of inflation in the US economy.

 

Fixed Income Change
Long (20+ years) 0.20%
Middle (7-10 years) -0.23%
Short (less than 1 year) 0.03%
TIPS -0.03%

 

Best and Worst Currencies Change
US Dollar -0.04%
Sweden krona 2.38%
Argentina peso -5.02%

 

 

The US dollar broke its string of advancing weeks last week as it declined by 0.04 percent against a basket of international currencies. The best performing currency last week was found in Sweden with the krona, as the currency added 2.38 percent against the value of the US dollar. The worst performing currency globally was found in Argentina for the second week in a row as the peso declined by 5.02 percent. This movement in the peso comes on the heels of a more than 5 percent decline last week on surprise central bank actions. The central bank in Argentina still looks like it is having trouble controlling the runaway inflation that is currently being seen in the country even after raising rates to 40 percent to try to combat this issue. Argentina last week was being called out as the first of what could be many emerging market economies that crack over the next several months as the strength of the US dollar combined with rising US interest rates make investing in emerging markets less compelling.

 

Commodities were mixed last week as precious metals and oil advanced while soft commodities saw mixed performance:

Metals Change   Commodity Change
Gold 0.37%   GS Commodity Index 0.91%
Silver 1.03%   Oil 1.14%
Copper 1.04%   Livestock 1.04%
      Grains -3.65%
      Agriculture -1.92%

 

The GS Commodity index posted a gain of 0.91 percent last week, as oil helped to boost the overall return. Oil advanced 1.14 percent during the week. The US having pulled out of the deal with Iran left many oil traders uncertain about the future movement of oil due to the geopolitical risk in the Middle East. Gold, Silver and Copper all posted gains last week, advancing by 0.37, 1.03 and 1.04 percent, respectively. Soft commodities were mixed last week as Livestock climbed 1.04 percent, while Agriculture overall decreased by 1.92 percent and Grains dropped by 3.65 percent, as US crop productions were shown to have increased during the week.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Merval Argentina 4.55%   BIST 100 Turkey -0.73%
RTS Index Russia 4.13%   SET Thailand -0.78%

Last week was a strong positive week in terms of international performance as 87 percent of indexes posted gains. After being the worst performing index two weeks ago because of the surprise action taken by the Central Bank of Argentina, the Argentinean based Merval index turned around and took the top position this week with a gain of 4.55 percent. Over the last two weeks, the movement of the index is almost exactly even. So far, despite the declines seen in the peso, the Central Bank seems to have boosted the local stock market. The worst performance globally last week was found in Thailand with the country’s SET index declining by 0.78 percent, as political and economic uncertainty remain top concerns for foreign investors investing within the country.

Last week, the VIX made it five weeks in a row of losses as the fear gauge gave up 14.35 percent. With the decline seen last week, the VIX solidly broke below the 13 level for the first time since the market fell apart back on January 26th, leading the VIX to spike higher. Breaking back under 13 last week, the recent spike in the VIX is officially over, having lasted a little under 4 months. Will complacency return to the markets or will investors remember that volatility is always present in investing? Only time will tell, but many investors’ memories are very short term. With the current VIX reading of 12.65, a move of 3.65 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week, the economic news releases were focused primarily on inflation in the US. There were no releases that significantly beat or missed expectations.

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 5/9/2018 PPI April 2018 0.1% 0.3%
Neutral 5/9/2018 Core PPI April 2018 0.2% 0.2%
Neutral 5/10/2018 CPI April 2018 0.2% 0.3%
Neutral 5/10/2018 Core CPI April 2018 0.1% 0.2%
Neutral 5/11/2018 University of Michigan Consumer Sentiment Index May 2018 98.80 99.50

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

 

Last week, the economic news releases started on Wednesday with the Producer Price Index (PPI), both overall and as a core calculation. Overall prices at the producer levels advanced less than was anticipated during the month as the PPI gained only 0.1 percent. When looking at core PPI the picture was not much better as the increase was the measly expected 0.2 percent, signifying that inflation continues to be stubbornly low despite very low unemployment and rising wage growth. When looking at the Consumer Price Index (CPI) the same low inflation readings were seen on both overall CPI and core CPI as neither reading managed to post a figure over 0.2 percent. The week wrapped up on Friday with the release of the University of Michigan’s Consumer Sentiment Index for the month of May (end of April reading), which came in very close to market expectations and had no noticeable impact on the overall markets.

 

This week is a slightly below average week in terms of the numbers of economic news releases with the focus of the releases 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
5/15/2018 Retail Sales April 2018 0.30%
5/15/2018 Retail Sales ex-auto April 2018 0.50%
5/15/2018 Empire Manufacturing May 2018 15
5/16/2018 Housing Starts April 2018 1325K
5/16/2018 Building Permits April 2018 1350K
5/17/2018 Philadelphia Fed May 2018 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 retail sales figure for the month of April, which are expected to show about half of the growth rate that was seen in March on an overall basis and double the growth rate that was seen in March on the retail sales excluding auto sales calculation. Both readings show that the overall retail picture in the US has lacked a meaningful increase for several months as consumers remain confident but are not spending money as one would expect with this level of confidence. Later during the day on Tuesday, the Empire manufacturing index for the month of May is set to be released with expectations of minor change over the April reading. On Wednesday, the housing start and building permit figures for the month of April are expected to both post readings of more than 1.3 million units for the second month in a row, despite the rising costs of building homes and the rising rates on mortgages. Wrapping up the week this week is the release of the Philadelphia Fed index for the month of May, which, much like the Empire manufacturing index released earlier during the week, is expected to show a slight change over the April level of 23.2. In addition to the scheduled economic news releases this week, we will also be hearing 11 different speeches by Fed officials, with any guidance on two or three more rate hikes during 2018 having the potential to move the markets.

 

Interesting Fact Apple and its place in history

With Apple closing in on a trillion-dollar valuation, I thought it would be interesting to look back at inflation adjusted figures for some other very large companies and compare just how large they were. The chart to the right (not updated to current Apple valuations) from Motley Fool shows that, based on historical values, if Apple makes it to $1 trillion it would be the sixth company to do so.

Source: The Motley Fool

For a PDF version of the below commentary please click here Weekly Letter 5-7-2018

Commentary quick take:

 

  • Major developments:
    • Markets had a wild ride, driven by earnings
    • Have we seen peak earnings?
    • Yields on fixed income came down slightly
    • No rate change from the FOMC meeting
    • No deal struck in China on trade

 

  • US:
    • May FOMC meeting yielded no change in rates
    • 1st Quarter Earnings Season
      • 81 percent complete
      • 78 percent of companies beating earnings estimates
      • 77 percent of companies beating revenue estimates
      • Blended earnings growth stands at 24.2 percent

 

  • Global:
    • Trade negotiations between US and China
    • Iran deal is uncertain
    • Oil prices increase

 

  • Hybrid investments strategy update:
    • Several changes to the hybrid models
    • Continued to step into some positions
    • Strong earnings results

 

  • This week for the markets:
    • Earnings season
    • Ongoing uncertainty over trade war with China

 

  • Interesting Fact: iPhones are not for everyone

 

Major theme of the markets last week: Peak earnings may be behind us

The major theme of the US financial markets last week was discussion about the idea that peak earnings are now behind the US markets. Going into the first quarter reporting season, earnings expectations were very lofty. With more than 80 percent of companies having reported their results, the results have not let investors down as they have consistently beat market expectations. However, with an earnings growth rate of more than 24 percent currently, many investors are left wondering what happens next since it is highly unlikely that the current rate of earnings growth will be sustainable, even for a single quarter longer; thus, creating the theory of “peak earnings.” In a normal economic cycle, earnings ebb and flow and if they stay positive, it is a good thing. This quarter, the numbers are greatly skewed by one-time tax benefits that many companies took early in the year, greatly increasing the look of companies beating earnings. These benefits that helped drive the strong numbers will not continue as many were one-time in nature. After this quarter, companies will once again be on their own to come up with earnings growth. One benefit to the stellar first quarter that could have a lasting impact on the markets is the idea of share buy backs, such as the $100 billion buy back that was recently announced by Apple. This buying of a company’s own stock essentially manufactures higher earnings growth as there are fewer shares in circulation, thus creating a seemingly higher growth rate per share with the same amount of earnings. This, however, points toward the main problem with the earnings season and future share buy backs. Companies are not organically growing their businesses anywhere near the speeds seen in earnings. This is also likely why the stock market in general has not moved very much at all over the past few weeks, despite the very strong numbers that have been reported. It is unknown where the markets will go from here, but the tail winds of exceptionally higher earnings growth and share buy backs will be coming to an end, leaving companies having to rely on their businesses for growth and not the magic of modern day financial accounting.


US news impacting the financial markets:

 

Last week, the primary focus of the US financial media was the ongoing earnings reporting that took place and the May FOMC meeting that concluded on Wednesday with no rate hike being undertaken. Going into the May meeting, there was little expectation (6 percent chance) of a rate hike. The market turned out to be correct in this assessment. In the statement released after the meeting, the Fed said “that the labor market has continued to strengthen, and that economic activity has been rising at a moderate rate.” The Fed also noted that inflation had moved closer to its 2 percent target since the March meeting and that it continued to plan on increasing rates at a “gradual” pace, which the markets took to mean two or three more times in 2018 with the next likely rate hike (94 percent chance) coming at the June meeting, after which there is a scheduled press conference by Fed Chair Jerome Powell. Overall, the markets took the May FOMC meeting in stride as there was no additional information released and nothing that was unexpected or unusual. With the FOMC meeting providing little reason for the markets to adjust, the financial media here in the US turned their attention fully to earnings season.

 

Last week, the fourth quarter 2018 earnings season saw a slight decrease in the number of companies reporting when compared to two weeks ago. 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:

 

Apple Computer 1% Cummins 13% Mastercard 19%
Archer Daniels Midland 45% CVS Caremark 6% McDonald’s 7%
Automatic Data Processing 6% Diebold -1300% Mondelez International 2%
Aetna 7% 3D Systems -400% Metropolitan Life 16%
AIG -16% DowDuPont 4% Merck & Company 6%
Arthur J Gallagher 1% Estee Lauder 9% Pfizer 4%
American Tower -64% Energizer 7% Republic Services 7%
Arrow Electronics 3% Gilead Sciences -11% Sprint 133%
Activision Blizzard 9% Hyatt Hotels 14% Skyworks Solutions 3%
Alibaba Group 3% Hanesbrands 8% Molson Coors -40%
Sotheby’s 143% Herbalife 31% Tesla Motors 1%
Ball 11% Humana 5% Under Armour 100%
BP Plc ADR 16% Imax 91% V F 3%
Berkshire Hathaway 6% J&J Snack Foods -16% Waste Connections 0%
Cardinal Health -8% Jack Henry 8% Western Union 7%
CBS 13% Kellogg 11% Xerox -3%
Church & Dwight 3% Kraft Heinz 9% Yum Brands 32%

 

There were not too many surprises last week in the various earnings announcements. Apple was the biggest announcement of the week, but its numbers came in very close to, but ultimately above, market expectations, pushing the stock higher. Apple pushed even higher (to all time highs) on Friday when Warren Buffett announced that he had purchased 75 million shares of Apple during the first quarter of 2018. Tesla’s earnings call made waves last week, not so much for any of the numbers it contained, but for CEO Elon Musk’s comments toward analysts who were asking basic questions about the company. You don’t hear too many answers on the analyst calls where the CEO says that was a “bonehead” question and quit “wasting my time,” but then again there are not too many CEOs like Elon Musk. Sprint was one of the larger gainers of the week last week, posting results that were more than 100 percent better than street estimates as the company looks to still be going forward with its merger with T-Mobile, despite the threat of a legal fight with the Department of Justice. Diebold’s earnings miss was eye opening as the company missed expectations by 1,300 percent. Granted, expectations were for a very small gain of $0.01, while the company posted a loss of $0.13. The company has been struggling with its voting machine and ATM business lines now for several years. The pain doesn’t look like it will end any time soon.

 

According to Factset, we have seen 407 (81 percent) of the S&P 500 companies release results for the first quarter of 2018. Of the 407 companies that have released earnings, 78 percent have beaten earnings estimates, while 5 percent have met expectations and 16 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 77 percent of the companies have beaten estimates, while 23 percent have fallen short. The overall blended earnings growth rate for the S&P 500 now stands at 24.2 percent, the highest reading since third quarter of 2010. Expectations going forward, when looking out the next few quarters, are that earnings growth will slow down, with Q2 2018 expected to see 18.2 percent growth, Q3 2018 21 percent and Q4 2018 16.9 percent. While the current growth rate above 24 percent looks very nice, it does not look like it will continue as comparable quarters become more difficult. As we get closer to the end of the year, it becomes increasingly unlikely that the above figure for the quarterly results will materially change.

 

This week is the fifth week of earnings reporting for the first quarter of 2018 and it is the start of a fast decline in the number of companies reporting earnings. 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:

 

ADT Hertz Global Papa John’s International
Anheuser-Busch JD.com Rambus
CenturyLink KAR Auction Services ROKU
Dillard’s La Quinta Toyota Motor
Walt Disney Marriott International T-MOBILE
Electronic Arts Meredith Tyson Foods
Etsy Maximus HOSTESS BRANDS
Twenty-First Century Fox Nissan Motor Wendy’s Arby’s
Groupon Nvidia Aqua America
Hain Celestial Group Office Depot Yelp
Henry Schein Occidental Petroleum Zillow Group

 

The primary type of companies reporting earnings this week are consumer facing companies as opposed to business to business companies that have made up the bulk of the reporting season so far. Walt Disney will be closely watched this week as the company is a good proxy for how leisure spending is going in the US, especially its theme park figures. ESPN and some of the other business lines at Disney will likely be under scrutiny as they have, for a long time, been money pits for the company. JD.com is a very large Chinese online retailer that will likely show a very profitable quarter during the first quarter as the company sees performance that is close to other FAANG stocks here in the US, which have all had good quarters. T-Mobile will be closely followed in the analyst call for any further information it may provide about the proposed merger with Sprint. Nvidia will be interesting to watch as we wait to see if the continued mining of bitcoin has been a windfall for the company or not as many of their graphics cards are utilized in the mining of bitcoins.

 

Global news impacting the markets:

 

Last week was a slow week for the global financial markets as the primary focus was a meeting between US officials and trade officials in China. There were also a number of holiday celebrations by different countries around the world that caused some markets to be closed during the week. The negotiating team sent by the US to China was led by Treasury Secretary Steve Mnuchin and while the media covered the meeting very little here in the US, international media had plenty to say about how things went. According to an unnamed US official, the team of Americans presented China with a list of demands prior to the start to the two-day meeting. This tactic did not improve the relations on trade between the two countries. One of the demands made is that the US wants China to not retaliate against the US by targeting US farmers or agriculture products. The document also says that China should not retaliate against new restrictions the US wants to put on Chinese investment in “sensitive sectors.” President Trump has said that his main goal with the proposed tariffs and ongoing negotiations with China is to close the $200 billion trade deficit with China that the US currently runs by 2020. However, the hardline tactics in the opening round of negotiations with China has left many trade policy academics thinking there is a shrinking chance of seeing an equitable deal come out of the negotiations. With China holding such a significant amount of US debt, it seems unlikely that the US threats and demands would need to be met by China as the country is more likely to see the demands as unreasonable and bully-like and continue to work through how it will retaliate in trade against the US. Despite the poor outcome of the negotiations’ first round, the US and global financial markets largely ignored the possibility of a trade war and pushed higher on the strong employment data released on Friday.

 

Iran also made several headlines last week as the US is currently pondering the pullout of the Iran nuclear deal, which President Trump has made his dislike for very well known. The deadline for the US to ratify the existing deal or pull out of the deal is May 12th. It is not surprising to see that with the uncertainty about the US decision, the price of oil around the world has increased. Brent crude oil briefly touched $75 per barrel last week before pulling back a little and ending the week just under $75, while West Texas Intermediate (WTI) closed the week just under $70 per barrel. If the US pulls out of the deal, it is likely that oil prices could continue to increase as sanctions by the US would once again be imposed on Iran’s oil exports. OPEC last week signaled that it liked the idea of $70 per barrel for the price of oil and Venezuela looks once again like it will have a drastic decrease in oil exports over the coming weeks as political problems continue to hamper the country.

 

Hybrid model performance and update

For the trading week ending on 5/4/2018, 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 -0.48% -3.53% 4.76%
Aggressive Benchmark -0.43% -0.67% 6.10%
Growth Model -0.32% -2.46% 4.31%
Growth Benchmark -0.33% -0.39% 4.94%
Moderate Model -0.11% -1.57% 3.54%
Moderate Benchmark -0.23% -0.12% 3.74%
Income Model 0.04% -1.54% 3.11%
Income Benchmark -0.10% 0.18% 2.18%
Quant Model -0.66% -5.82%
S&P 500 -0.24% 0.10% 9.58%

*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 as sell points were hit on two positions and there were several positions added to and initiated during the week. Two long held stocks were sold last week as both Northrop Grumman and Raytheon both hit long standing trigger points for selling the positions. For those of you who have been in the hybrid models since the beginning, both positions represented very strong long-term gains; more than 100 percent on each position. Proceeds from the sales were put into cash. Purchases last week were made in the short duration high yield bond fund ticker HYS as I continue to build this position toward a full weighting. Also purchased last week was a subsequent step into US Small caps through the Index IQ Chaikin small cap ETF (CSML). New positions were added in an inverse Dow fund (UWPIX) as correlations between equity holdings and the Dow have increased to correlations that are higher than the S&P 500 due to recent changes in equity holdings. An initial partial position in a robotics and artificial intelligence ETF, with BOTZ, was also added in the more aggressive hybrid models during the week last week. In total last week, there were many moving parts in the hybrid models as the models are being adjusted for moving past earnings season and on to summer trading. Republic Service Group and McDonalds were the highlights of the week last week in terms of equity holdings that beat their earnings expectations as both companies saw robust growth. VF Corp was the laggard last week as earnings were very strong and beat market expectations in both revenues and earnings per share. However, investors still have concerns about the company’s jeans clothing lines, which saw a decline in sales during the quarter. The decline of more than 4 percent on such a strong earnings report and strong forward guidance seems significantly overdone.

 

Market Statistics:

 

Index Change Volume
NASDAQ 1.26% Below Average
Dow -0.20% Average
S&P 500 -0.24% Average

 

There was a wide dispersion of returns last week seen on the three main US indexes with all of the difference explained by a single stock—Apple. With the NASDAQ having such a significant weight toward Apple and Apple increasing by more than 13 percent during the week last week, the company single handedly kept the index from positing a loss for the week. Even with the huge gains seen in Apple last week, the overall weekly volume on NASDAQ failed to make it to average, while both the Dow and the S&P 500 managed to see average weekly volume, despite moving lower for the week. Without the single stock catalyst this coming week, it will be very interesting to see if the US indexes are able to hold on to the current levels or if they fall back a little further.

 

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
Semiconductors 3.35%   Telecommunications -2.69%
Technology 2.99%   Healthcare -2.77%
Software 2.28%   Biotechnology -3.09%
Residential Real Estate 1.53%   Pharmaceuticals -3.29%
Oil & Gas Exploration 1.18%   Insurance -3.29%

 

With the jump in Apple last week, all things remotely related to the company rode the company’s coattails higher. Semiconductors led the way after having been down the previous few weeks on concern over weak Apple sales. Technology overall came in second place, gaining nearly 3 percent, again thanks to Apple, while Software increased by more than two percent on the week. Residential Real Estate came in fourth last week, gaining 1.5 percent as the US housing market continues to look robust despite the seemingly sky-high prices being seen in many of the markets around the country. Oil and Gas Exploration just made it onto the top five sectors list last week as oil prices increased, thanks to uncertainty over the situation with Iran and the nuclear deal that may or may not be agreed to with the US. On the negative side, Insurance took the bottom spot, falling more than 3 percent and matching the negative performance of Pharmaceuticals, as the sectors looks to face increasing competition from nontraditional players. Biotechnology and Healthcare overall sold off with Pharma. The whole super sector of Healthcare declined as earnings did nothing to offset structural headwinds. Telecommunications rounded out the bottom five performing sectors last week as uncertainty over the T-Mobile and Sprint merger negatively impacted the sector as Sprint declined by nearly 20 percent.

 

There was a lack of unusual movement in the fixed income markets last week here in the US as we did not see any further flattening of the yield curve, nor did we see the 10-year Treasury make another run at a 3 percent yield. With the FOMC statement not changing much and holding almost no new pertinent information, as discussed above, it was a calm week for the fixed income markets.

 

Fixed Income Change
Long (20+ years) 0.31%
Middle (7-10 years) 0.24%
Short (less than 1 year) 0.03%
TIPS 0.07%

 

Best and Worst Currencies Change
US Dollar 1.25%
Egypt pound 0.35%
Argentina peso -5.95%

 

 

The US dollar had a second strong week in a row last week, advancing 1.25 percent against a basket of international currencies. The best performing currency last week was found in the Egypt with the pound, as the currency added 0.35 percent against the value of the US dollar. It is unusual for Egypt to make the top of the currency moving list as the country is still struggling after ousting its government several years ago. The worst performing currency globally was found in Argentina as the peso declined by 5.95 percent. The move in the peso was surprisingly small for the week as the government took some very drastic measures. The government in Argentina, to combat inflation that is running as high as 25 percent, jumped its monetary policy rate up to 40 percent from 27.25 percent without warning. This action sent its currency and stock exchange into a tailspin. Unlike the US Fed, which likes to telegraph exactly what it is thinking and what it may do, the central bank in Argentina is much less transparent.

 

Commodities were mixed last week as precious metals declined, while other commodities advanced:

Metals Change   Commodity Change
Gold -0.76%   GS Commodity Index 1.44%
Silver -0.19%   Oil 2.62%
Copper 0.23%   Livestock 0.14%
      Grains 1.48%
      Agriculture 0.52%

 

The GS Commodity index posted a gain of 1.44 percent last week, as oil helped to boost the overall return. Oil advanced 2.62 percent during the week as uncertainty over Iranian and Venezuelan supplies rattled the global oil markets. Gold and Silver posted losses last week, falling by 0.76 and 0.19 percent, respectively, while the most industrially used Copper advanced by 0.23 percent. Soft commodities were all positive last week as Livestock climbed 0.14 percent, while Agriculture overall increased by 0.52 percent and Grains posted a second week of strong gains, advancing 1.48 percent.

 

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
S & P/NZX 50 New Zealand 2.14%   BIST 100 Turkey -4.66%
DAX Germany 1.90%   Merval Argentina -4.84%

Last week was a mixed week in terms of international performance as 46 percent of indexes posted gains. New Zealand saw the largest gains last week as the country’s NZX 50 advanced 2.14 percent, as the country seems to be benefitting from the ongoing trade concerns between the US and China. The worst performance globally last week, as alluded to above, was found in Argentina with the country’s Merval index declining by 4.84 percent. Only time will tell if the government actions on interest rates and other monetary policies turn out to be the correct course of action. One thing is clear and that is that investors do not like to be blindsided by government actions.

Last week, the VIX made it four weeks in a row of losses as the fear gauge gave up 4.15 percent. With the VIX now staying below 16 for the better part of two weeks, some investors are saying that the VIX spike of the past month is officially over. However, the VIX still remains significantly above the range it had been stuck in prior to the spike. With the current VIX reading of 14.77, a move of 4.26 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

Economic Release Calendar:

 

Last week the economic news releases were focused primarily on employment in the US. There were no releases that significantly beat or missed expectations.

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/30/2018 Personal Income March 2018 0.30% 0.40%
Neutral 4/30/2018 Personal Spending March 2018 0.40% 0.40%
Neutral 4/30/2018 PCE Prices March 2018 0.00% 0.00%
Neutral 4/30/2018 PCE Prices – Core March 2018 0.20% 0.20%
Neutral 4/30/2018 Chicago PMI April 2018 57.6 58.0
Neutral 5/1/2018 ISM Index April 2018 57.3 58.5
Neutral 5/2/2018 FOMC Rate Decision May 2018 No Change No Change
Neutral 5/3/2018 ISM Services April 2018 56.8 58.3
Slightly Negative 5/4/2018 Nonfarm Payrolls April 2018 164K 190K
Slightly Negative 5/4/2018 Nonfarm Private Payrolls April 2018 168K 193K
Slightly Positive 5/4/2018 Unemployment Rate April 2018 3.90% 4.00%

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

 

Last week, the economic news releases started on Monday with the release of the March reading for personal income and spending, both of which came in very close to market expectations and had no notable impact on the markets. PCE prices were also released on Monday, but like the income and spending figures, both PCE calculations came in very close to market expectations. On Tuesday, the ISM index for the month of April was released and came in very close to expectations as manufacturing in the region continues to expand. Wednesday was Fed day in the US with the conclusion of the May FOMC meeting resulting in no change in rates and very small changes in the statement. Friday was a busy day for economic news releases as all the standard employment related data for the month of April were released by the government. Payroll figures came up a little short of expectations, but were close enough that the markets did not have an adverse reaction. Overall unemployment in the US ticked down by one tenth of a percent, finally breaking below the 4 percent level for the first time in many years. Average hourly earnings were stagnant, growing at only 0.1 percent (slightly less than was anticipated), and the overall labor force participation rate declined to 62.8 from 62.9 in March. In aggregate, the employment information released on Friday points to a US labor market that is doing well, but continuing to feel some pressure from a lack of wage growth. The employment information released also likely will not change any of the thinking of the Fed when considering the timing and number of rate hikes that will be coming later in 2018.

 

This week is a slow week in terms of the numbers of economic news releases with the focus of the releases being inflation. Releases that have the most potential to impact the overall markets this week are highlighted in green:

 

Date Release Release Range Market Expectation
5/9/2018 PPI April 2018 0.3%
5/9/2018 Core PPI April 2018 0.2%
5/10/2018 CPI April 2018 0.3%
5/10/2018 Core CPI April 2018 0.2%
5/11/2018 University of Michigan Consumer Sentiment Index May 2018 99.50

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

 

This week, the economic news releases start on Wednesday with the Producer Price Index (PPI), both overall and as a core calculation. Prices at the producer level are expected to show a very small gain of 0.3 percent overall and 0.2 percent when looking at core, with much of the overall gain being derived from the price of energy. This relationship of energy driving costs up during April is also expected to be seen in the Consumer Price Index (CPI) that is set to be released on Thursday. The only way that either the PPI or the CPI numbers have a meaningful impact on the market this week is if we see a very high, unexpected reading on any of the numbers as this could indicate inflation that the markets are currently considering to be very low. If we see a sustained jump in inflation, it could force the Fed’s hand a little, causing it to raise rates faster than it otherwise would. The week wraps up on Friday with the release of the University of Michigan’s Consumer Sentiment Index for the month of May (end of April reading). Expectations are for a slight change over the mid-April reading and should have no notable impact on the overall markets. In addition to the above scheduled economic news releases, there are seven speeches being given by Fed officials that the markets will be listening to for insight into what the fed is currently thinking about the US economy.

 

Interesting Fact iPhones are not for everyone

 

In an effort to recapture their youth and pull children from their iPhones, parents have led a resurgence of board games. Sales of games and puzzles in the U.S. grew 27% between 2015 and last year, hitting $2.09 billion, according to NPD Group Inc., far outpacing sales growth for all toys.

 

Source: Wall Street Journal