For a PDF version of the below commentary please click here Weekly Letter 3-19-2018
Commentary quick take:
- Major developments:
- Markets moved lower for the week
- Consumer sentiment highest since April 2004
- Four rate hikes could be in the cards
- US:
- Markets moved lower
- PA special election upset
- Rex Tillerson is out
- Global:
- Trade war talk continues
- Brexit deadline extended 21 months
- Putin won the election
- Hybrid investments strategy update:
- No changes over the course of the past week
- This week for the markets:
- Political uncertainty
- FOMC March meeting
- Dot Plot and expectations from Fed
- Interesting Fact: Geoffrey the Giraffe
Major theme of the markets last week: Long time since Fed hawks have been let out
The major theme of the US markets last week was inflation data released during the week and speculation about how the Fed would view the data going into this week’s FOMC meeting. There were several different inflation indicators released last week with import prices being the primary driver of increasing inflation, due almost entirely to the weakness seen in the US dollar. As the US dollar declines against foreign currencies, the price of imports increases and is inflationary to the overall US economy. Additionally, last week we saw consumer sentiment increase to the highest level since 2004; this is also historically a precursor to inflation. On the flip side last week, both the consumer price index (CPI) and the producer price index (PPI) came in at expectations, which were for very low readings of inflation. The question now becomes whether the hawkish inflationary data last week outweigh the more subdued inflation data and whether Jerome Powell will steer the FOMC toward picking up the pace of rate hikes during 2018. Currently, the odds of a rate hike at the meeting this week are about as certain as they can be, running with a higher than 95 percent chance of a hike. Fixed income markets have already priced in the move, but have yet to fully price in four rate hikes in 2018, which looks like it could be on the table.
US news impacting the financial markets:
Aside from speculation about the upcoming FOMC meeting and the potential for four rate hikes this year, the US financial media once again focused on the White House and was fearful of what may start to occur with global trade. On Tuesday last week, President Trump announced that Secretary of State Rex Tillerson was being replaced by CIA director Mike Pompeo. After top economic adviser Gary Cohn was let go two weeks ago, it became clear that a further shuffling of staff in the White House was highly possible. All of the changes greatly increase the risk of a “Presidency of one” starting to form, in which no one is left in the administration other than advisers who only say “Yes” to all of President Trump’s ideas. Rex Tillerson being released is concerning to the markets because he was a well-known advocate of free trade and, much like Gary Cohn, was against President Trump’s tariffs put in place on steel and aluminum. Being the former CEO of Exxon, Rex Tillerson also had many personal relationships with business and global leaders around the world, something Pompeo lacks that could leave him in a precarious spot as he learns the ropes of international diplomacy. When news broke that Chief of Staff John Kelly was on the outside looking in, the markets feared that yet another independent thinking high ranking staff member of the White House could be on their way out. Toward the end of the trading week last week, there was also increasing speculation that President Trump may attempt to shut down special investigator Robert Muller’s investigation as Muller last week subpoenaed many corporate financial records from the Trump administration, a “red line” in the past for President Trump. Over the weekend, President Trump took to Twitter more than normal, lashing out at Special Council Muller, enough so that Republicans in Congress warned it would be the beginning of the end should Trump have Muller fired. Politics that did not directly involve President Trump also made a few headlines last week with a special election being held in Pennsylvania.
On Tuesday last week, there was a special election in Pennsylvania’s 18th Congressional district after Republican Tim Murphy was forced to resign late last year due to an affair. The 18th district was a district that President Trump carried by 20 percent in the election in 2016 and was seen as a good test for what could happen during the upcoming mid-term elections in November. Democrat Conor Lamb beat out Republican Rick Saccone by a very narrow margin (the GOP is contesting the results in court) despite the Republican party pushing $10 million into the normally small-time district and having several high-profile people speak at campaign rallies. In the end, this election will have little impact on anything as the district is being absorbed by a larger district in the upcoming midterm election, but the results still have Republicans concerned about their future in November. The financial markets took the results in stride and did not react as one would expect if a significant number of investors changed their mind about who would control the House in Congress following the mid-term elections. Democrats still need to pick up 27 seats to take control, which is a very tall order, but after the results in PA, it seems slightly more manageable. Republicans running in November must now start to decide if they will align with President Trump or distance themselves in hopes of securing their seat once again. If the Democrats manage to take the House in November, it would probably be neutral for the financial markets as we would then have a divided government with very little able to be done as both sides would have to agree on legislation to get anything passed. Democratic control of the House would also potentially speed up any potential impeachment processes against President Trump, an action that could have an adverse impact on the US financial markets.
Global news impacting the markets:
Trade wars and politics took most of the international financial headlines last week. US President Trump late in the week asked for a new round of potential tariffs against China, specifically, to be drawn up. So far, China has held back on its reactions to the Steel and Aluminum tariffs as the loop holes opened by Canada and Mexico getting exemptions is enough for China to work within the rules and still push its products to the US. However, if the administration specifically targets China with another set of tariffs, retaliatory measures will have to be taken by China. President Xi Jinping is now securely placed in the leadership role for China for the rest of his life and can afford, more so than President Trump, to play dirty with a trade war in the short term to secure a longer-term victory. As discussed below, Boeing appears to potentially be a pawn in the trade war with the stock already sliding almost 10 percent since the trade war rhetoric was increased. The international news was not all negative last week, however, as there was a breakthrough in Brexit negotiations over the past weekend.
An announcement was made late on Sunday that negotiators had agreed to extend the Brexit deadline by 21 months from March of 2019 until December of 2020 to smooth the transition of the UK out of the EU. The agreement, which is not fully completed, has items that both sides like and dislike, with the main sticking point being that if an agreement cannot be made between the UK and Northern Ireland by the new deadline, Northern Ireland would automatically stay within the EU, effectively being forcefully broken from the UK. One of the big developments of the deal reached is that, during the transition period, the UK will be allowed to negotiate a new trade deal with the EU. This had been a sticking point for the EU in the past as they did not want any trade negotiations to occur until after the Brexit date. Both sides acknowledged that while this draft was complete, they are still a long way from the finish line and that the momentum of the last few weeks of negotiations should be carried on if it lasts. Global market futures reacted positively to the announcement over the weekend as Brexit has remained one of the great uncertainties of the past several quarters and any resolution to the situation should be embraced by the markets.
Russia also made a few headlines last week as President Putin easily won the Presidential election that was held over the past weekend, winning 76 percent of the popular vote, though voter turnout remained below what he would have liked at only 67 percent of eligible voters. The results were a positive for the Russian government, which is currently embattled with the UK over the poisoning of a former spy and his daughter and the US investigation into collusion between President Trump and Russia during the election.
Hybrid model performance and update
For the trading week ending on 3/16/2018, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:
| |
Last Week |
2018 YTD |
Since 6/30/2015
(Annualized) |
| Aggressive Model |
-0.87% |
0.25% |
6.51% |
| Aggressive Benchmark |
-0.50% |
1.70% |
7.34% |
| Growth Model |
-0.50% |
0.27% |
5.60% |
| Growth Benchmark |
-0.39% |
1.40% |
5.88% |
| Moderate Model |
-0.19% |
0.21% |
4.41% |
| Moderate Benchmark |
-0.27% |
1.09% |
4.39% |
| Income Model |
-0.02% |
-0.10% |
3.82% |
| Income Benchmark |
-0.12% |
0.68% |
2.47% |
| Quant Model |
-0.53% |
-6.65% |
– |
| S&P 500 |
-1.24% |
2.93% |
11.22% |
*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.
There were no changes to the hybrid models over the course of the previous week. Cash levels remain elevated across all the hybrid models as partial positions are being picked up on dips in the markets.
Market Statistics:
| Index |
Change |
Volume |
| NASDAQ |
-1.04% |
Below Average |
| S&P 500 |
-1.24% |
Below Average |
| Dow |
-1.54% |
Average |
All three of the major US indexes declined for the week last week with the Dow leading the way lower. During a downward moving week, it is unusual to have the Dow decline the most and the NASDAQ decline the least, but the performance of the Dow was driven primarily by one component stock declining—Boeing. Boeing last week declined by almost 7 percent as fears over a trade war between the US and China put China’s massive airplane order from Boeing in the cross hairs. Last year, Boeing took orders worth $26 billion over the next few years from Chinese airlines. However, the airlines also indicated that they would like to purchase more than 7,000 planes over the next 20 years at a total cost of about $1.1 trillion. Any trade war fears that could impact this deal going forward would have a significant impact on Boeing and we saw just a small adverse reaction in the stock price movement. Volume overall for the week on the three major indexes was below average despite higher than average daily volume on Friday as it was a quadruple witching day for options expiring.
The following were the top 5 and bottom 5 performing sectors over the course of the previous week:
| Top 5 Sectors |
Change |
|
Bottom 5 Sectors |
Change |
| Utilities |
2.54% |
|
Broker Dealers |
-1.97% |
| Global Real Estate |
1.80% |
|
Regional Banks |
-2.09% |
| Consumer Discretionary |
0.01% |
|
Financial Services |
-2.18% |
| Commodities |
0.00% |
|
Basic Materials |
-3.29% |
| Semiconductors |
-0.12% |
|
Aerospace & Defense |
-3.38% |
Four of the top five performing sectors last week were classic risk off trades as Utilities, Global Real Estate, Consumer Discretionary and Commodities all turned in flat to positive returns. The increase in Utilities was primarily driven by investors looking for yield as the yields on many fixed income investments declined last week. Semiconductors was the odd mover among the top five performing sectors last week as this sector is normally one of the largest decliners on weeks that the markets decline. However, Intel had a relatively strong week last week, helping to prop up the sector as strong demand for semiconductors continues to be seen around the world. On the negative side last week, Aerospace and Defense was brought down by the poor performance of Boeing, as mentioned above, leading the sector to decline by more than 3 percent. Basic Materials lost the second most last week as fears of global trade wars adversely impacted the sector. Financial related sectors made up the remaining three sectors on the negative side of performance last week as everyone waits to see how much the Fed policy statement and dot plot may change under the new chair.
US fixed income markets all increased last week pushing yields lower across the board. The primary driver of the bond market performance last week was a general lack of inflation being seen in the economic data that was released; more about that below in the economic news section.
| Fixed Income |
Change |
| Long (20+ years) |
1.61% |
| Middle (7-10 years) |
0.44% |
| Short (less than 1 year) |
0.02% |
| TIPS |
0.16% |
| Best and Worst Currencies |
Change |
| US Dollar |
0.30% |
| Venezuela bolivar |
9.03% |
| Turkey lira |
-2.78% |
The US dollar had an uneventful week, gaining 0.30 percent against a basket of international currencies as traders continue to try to assess the revolving door of employees at the White House and what, if any, impact it could have on the potential trade war and US dollar. The best performing currency last week was found in Venezuela and was the Bolivar, which gained 9.03 percent. While this may sound like a great move higher, it is less than a third of what the currency has lost of the past three weeks as the Bolivar continues to trade in a very erratic fashion. The worst performing currency last week globally was found in Turkey as the Lira declined by 2.78 percent.
Commodities were mixed over the course of the previous week as oil moved higher while all of the other commodities pushed lower:
| Metals |
Change |
|
Commodity |
Change |
| Gold |
-0.75% |
|
GS Commodity Index |
0.00% |
| Silver |
-1.54% |
|
Oil |
0.64% |
| Copper |
-1.10% |
|
Livestock |
-0.92% |
| |
|
|
Grains |
-1.70% |
| |
|
|
Agriculture |
-0.83% |
The GS Commodity index posted no change last week, as gains in oil were offset by losses in other commodities. Oil gained 0.64 percent as the heir apparent to the Saudi King visited several other countries around the world, including the US where he got a firsthand look at the oil shale production that is going on. Gold, Silver and Copper all posted losses last week, declining by 0.75, 1.54 and 1.10 percent, respectively. Soft commodities were down as well last week as Livestock declined 0.92 percent, while Agriculture overall decreased by 0.83 percent and Grains posted a loss of 1.70 percent.
| Top 2 Indexes |
Country |
Change |
|
Bottom 2 Indexes |
Country |
Change |
| SET |
Thailand |
2.05% |
|
IPC All-Share |
Mexico |
-2.22% |
| Hang Seng |
Hong Kong |
1.63% |
|
RTS Index |
Russia |
-2.43% |
Last week was a mixed week for the global financial markets as 41 percent of the major indexes advanced for the week. Thailand’s SET index posted the largest gain last week of any of the global indexes, advancing 2.05 percent. Russia’s RTS index turned in the worst performance of the week last week, giving up 2.43 percent last week as the UK expelled 23 Russian diplomats over a nerve agent poisoning as well as another suspicious death of a critic of Russian President Putin. Russian President Putin easily won a Presidential election over the weekend, but voter turn-out probably would not have been so great if it were not for the promise of cheap or free food being given out near many of the polling places.
The wild roller coaster movement of the VIX came to an end last week with the VIX only gaining 7.92 percent. It was the first week of the past seven that we did not see a double digit move either up or down on the VIX. With the current VIX reading of 15.80, it implies that a move of 4.56 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.
Economic Release Calendar:
Last week was a full week for economic news releases with the primary focus of the releases being inflation indicators. There were two releases that meaningfully beat market expectations (highlighted in green below) and one that significantly missed market expectations (highlighted in red below):
| Economic Impact |
Date |
Economic News Release |
Date Range |
Actual |
Expectation |
| Neutral |
3/13/2018 |
CPI |
February 2018 |
0.20% |
0.20% |
| Neutral |
3/13/2018 |
Core CPI |
February 2018 |
0.20% |
0.20% |
| Negative |
3/14/2018 |
Retail Sales |
February 2018 |
-0.10% |
0.30% |
| Slightly Negative |
3/14/2018 |
Retail Sales ex-auto |
February 2018 |
0.20% |
0.40% |
| Neutral |
3/14/2018 |
PPI |
February 2018 |
0.20% |
0.10% |
| Neutral |
3/14/2018 |
Core PPI |
February 2018 |
0.20% |
0.20% |
| Positive |
3/15/2018 |
Empire Manufacturing |
March 2018 |
22.5 |
15 |
| Neutral |
3/15/2018 |
Philadelphia Fed |
March 2018 |
22.3 |
23.7 |
| Neutral |
3/16/2018 |
Housing Starts |
February 2018 |
1236K |
1283K |
| Neutral |
3/16/2018 |
Building Permits |
February 2018 |
1298K |
1330K |
| Positive |
3/16/2018 |
University of Michigan Consumer Sentiment Index |
March 2018 |
102.0 |
99.5 |
Data for table from Econoday.com, Bloomberg and Yahoo Finance
Last week, the economic news releases started on Tuesday with the release of the Consumer Price Index (CPI) for the month of February, which came in exactly in line with expectations at 0.2 percent when looking at overall CPI and at the core CPI calculation. On Wednesday, retail sales for the month of February were released and disappointed the markets with overall retail sales posting a decline of 0.1 percent versus the expected gain of 0.3 percent. When looking at retail sales excluding auto sales, the February number looked better, showing a gain of 0.2 percent, still below expectations, which were for 0.4 percent, but at least in positive territory. Also released on Wednesday was the Producer Price Index (PPI) for the month of February, which came in very close to market expectations, both overall and when only looking at the core calculation. Both the PPI and CPI numbers released last week indicate that inflation remains very subdued in the US economy, something the Fed will have to address at this week’s upcoming FOMC meeting, at which they are expected to raise interest rates. On Thursday, the Empire Manufacturing index for the month of March was released and came in significantly above markets expectations with a reading of 22.5, while the market had been looking for only 15. The Philly Fed index, also released on Thursday, fell slightly short of expectations, but remained in solid growth mode and was largely overlooked by the markets. On Friday, two pieces of US housing information, the housing starts and building permits figures, for the month of February were released with both coming in very close to market expectations and having no noticeable impact on the overall markets. Wrapping up the week last week was the release of the University of Michigan’s Consumer Sentiment Index for the month of March (end of February reading), which came in above expectations, positing a reading of 102.0, the highest reading for the index since April of 2004. The strong and unexpected reading from the consumer sentiment index combined with the poor reading from retail sales has some economists concerned that the US economy may be weaker than many people think as everyone waits to see if the tax cuts will have a positive impact on the overall economy.
This week is a slow week for economic news releases, but there are a few releases that could impact the overall movement of the markets. Releases that have the most potential to impact the overall markets this week are highlighted in green:
| Date |
Release |
Release Range |
Market Expectation |
| 3/21/2018 |
Existing Home Sales |
February 2018 |
5.42M |
| 3/21/2018 |
FOMC Rate Decision |
March 2018 |
1.63% |
| 3/23/2018 |
Durable Orders |
February 2018 |
1.50% |
| 3/23/2018 |
Durable Goods –ex transportation |
February 2018 |
0.60% |
| 3/23/2018 |
New Home Sales |
February 2018 |
620K |
Data for table from Econoday.com, Bloomberg and Yahoo Finance
This week the economic news releases start on Wednesday with the release of the existing home sales figure for the month of February, which is expected to post a reading of 5.4 million units. Likely overshadowing the existing home sales figure on Wednesday is the conclusion of the March FOMC meeting of the Federal Reserve. This meeting is the first FOMC meeting with a press conference and an expected rate hike for new Fed Chair Jerome Powell. This meeting is also one of the meetings after which the Fed releases their latest rate expectations in the form of the dot plot. The dot plot always draws a lot of attention from Wall Street as the street tries to decipher which dots belong to which Fed officials and what it could mean of the future of Fed rate hikes. Aside from the dot plot, the markets will be very closely watching and listening for any indication of a fourth rate hike being in the cards during 2018. On Friday this week, the February durable goods orders figures are set to be released with expectations of 1.5 percent growth overall and 0.6 percent when excluding transportation. With the poor reading on retail sales that we saw last week, it would not be surprising to see both durable goods orders figures miss market expectations. Wrapping up the economic news releases this week is the release of the February new home sales figure, which, much like the other housing related releases for the month of February, should have no meaningful impact on the overall markets. In addition to the FOMC meeting and press conference that follows, there are three other Fed officials giving speeches next week that the markets will be watching very closely for clues about future Fed actions.
Interesting Fact —Toys ‘R’ Us is closing down
It was announced last week that Toys ‘R’ US will liquidate all its remaining stores after struggling for years to overcome a mountain of debt. The brand, which started in June of 1957, is recognizable to almost all adults that grew up during the 1970’s, 1980’s and 1990’s. The “R” in the logo was designed backwards so that it looked like a child wrote the name. Geoffrey the Giraffe was added to the brand in May of 1965 and remained part of the logo thereafter.
Source: Toysrusinc.com
Peter's Stock Market Blog
Financial Market Commentary March 19th 2018
March 19, 2018
For a PDF version of the below commentary please click here Weekly Letter 3-19-2018
Commentary quick take:
Major theme of the markets last week: Long time since Fed hawks have been let out
The major theme of the US markets last week was inflation data released during the week and speculation about how the Fed would view the data going into this week’s FOMC meeting. There were several different inflation indicators released last week with import prices being the primary driver of increasing inflation, due almost entirely to the weakness seen in the US dollar. As the US dollar declines against foreign currencies, the price of imports increases and is inflationary to the overall US economy. Additionally, last week we saw consumer sentiment increase to the highest level since 2004; this is also historically a precursor to inflation. On the flip side last week, both the consumer price index (CPI) and the producer price index (PPI) came in at expectations, which were for very low readings of inflation. The question now becomes whether the hawkish inflationary data last week outweigh the more subdued inflation data and whether Jerome Powell will steer the FOMC toward picking up the pace of rate hikes during 2018. Currently, the odds of a rate hike at the meeting this week are about as certain as they can be, running with a higher than 95 percent chance of a hike. Fixed income markets have already priced in the move, but have yet to fully price in four rate hikes in 2018, which looks like it could be on the table.
US news impacting the financial markets:
Aside from speculation about the upcoming FOMC meeting and the potential for four rate hikes this year, the US financial media once again focused on the White House and was fearful of what may start to occur with global trade. On Tuesday last week, President Trump announced that Secretary of State Rex Tillerson was being replaced by CIA director Mike Pompeo. After top economic adviser Gary Cohn was let go two weeks ago, it became clear that a further shuffling of staff in the White House was highly possible. All of the changes greatly increase the risk of a “Presidency of one” starting to form, in which no one is left in the administration other than advisers who only say “Yes” to all of President Trump’s ideas. Rex Tillerson being released is concerning to the markets because he was a well-known advocate of free trade and, much like Gary Cohn, was against President Trump’s tariffs put in place on steel and aluminum. Being the former CEO of Exxon, Rex Tillerson also had many personal relationships with business and global leaders around the world, something Pompeo lacks that could leave him in a precarious spot as he learns the ropes of international diplomacy. When news broke that Chief of Staff John Kelly was on the outside looking in, the markets feared that yet another independent thinking high ranking staff member of the White House could be on their way out. Toward the end of the trading week last week, there was also increasing speculation that President Trump may attempt to shut down special investigator Robert Muller’s investigation as Muller last week subpoenaed many corporate financial records from the Trump administration, a “red line” in the past for President Trump. Over the weekend, President Trump took to Twitter more than normal, lashing out at Special Council Muller, enough so that Republicans in Congress warned it would be the beginning of the end should Trump have Muller fired. Politics that did not directly involve President Trump also made a few headlines last week with a special election being held in Pennsylvania.
On Tuesday last week, there was a special election in Pennsylvania’s 18th Congressional district after Republican Tim Murphy was forced to resign late last year due to an affair. The 18th district was a district that President Trump carried by 20 percent in the election in 2016 and was seen as a good test for what could happen during the upcoming mid-term elections in November. Democrat Conor Lamb beat out Republican Rick Saccone by a very narrow margin (the GOP is contesting the results in court) despite the Republican party pushing $10 million into the normally small-time district and having several high-profile people speak at campaign rallies. In the end, this election will have little impact on anything as the district is being absorbed by a larger district in the upcoming midterm election, but the results still have Republicans concerned about their future in November. The financial markets took the results in stride and did not react as one would expect if a significant number of investors changed their mind about who would control the House in Congress following the mid-term elections. Democrats still need to pick up 27 seats to take control, which is a very tall order, but after the results in PA, it seems slightly more manageable. Republicans running in November must now start to decide if they will align with President Trump or distance themselves in hopes of securing their seat once again. If the Democrats manage to take the House in November, it would probably be neutral for the financial markets as we would then have a divided government with very little able to be done as both sides would have to agree on legislation to get anything passed. Democratic control of the House would also potentially speed up any potential impeachment processes against President Trump, an action that could have an adverse impact on the US financial markets.
Global news impacting the markets:
Trade wars and politics took most of the international financial headlines last week. US President Trump late in the week asked for a new round of potential tariffs against China, specifically, to be drawn up. So far, China has held back on its reactions to the Steel and Aluminum tariffs as the loop holes opened by Canada and Mexico getting exemptions is enough for China to work within the rules and still push its products to the US. However, if the administration specifically targets China with another set of tariffs, retaliatory measures will have to be taken by China. President Xi Jinping is now securely placed in the leadership role for China for the rest of his life and can afford, more so than President Trump, to play dirty with a trade war in the short term to secure a longer-term victory. As discussed below, Boeing appears to potentially be a pawn in the trade war with the stock already sliding almost 10 percent since the trade war rhetoric was increased. The international news was not all negative last week, however, as there was a breakthrough in Brexit negotiations over the past weekend.
An announcement was made late on Sunday that negotiators had agreed to extend the Brexit deadline by 21 months from March of 2019 until December of 2020 to smooth the transition of the UK out of the EU. The agreement, which is not fully completed, has items that both sides like and dislike, with the main sticking point being that if an agreement cannot be made between the UK and Northern Ireland by the new deadline, Northern Ireland would automatically stay within the EU, effectively being forcefully broken from the UK. One of the big developments of the deal reached is that, during the transition period, the UK will be allowed to negotiate a new trade deal with the EU. This had been a sticking point for the EU in the past as they did not want any trade negotiations to occur until after the Brexit date. Both sides acknowledged that while this draft was complete, they are still a long way from the finish line and that the momentum of the last few weeks of negotiations should be carried on if it lasts. Global market futures reacted positively to the announcement over the weekend as Brexit has remained one of the great uncertainties of the past several quarters and any resolution to the situation should be embraced by the markets.
Russia also made a few headlines last week as President Putin easily won the Presidential election that was held over the past weekend, winning 76 percent of the popular vote, though voter turnout remained below what he would have liked at only 67 percent of eligible voters. The results were a positive for the Russian government, which is currently embattled with the UK over the poisoning of a former spy and his daughter and the US investigation into collusion between President Trump and Russia during the election.
Hybrid model performance and update
For the trading week ending on 3/16/2018, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:
(Annualized)
*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.
There were no changes to the hybrid models over the course of the previous week. Cash levels remain elevated across all the hybrid models as partial positions are being picked up on dips in the markets.
Market Statistics:
All three of the major US indexes declined for the week last week with the Dow leading the way lower. During a downward moving week, it is unusual to have the Dow decline the most and the NASDAQ decline the least, but the performance of the Dow was driven primarily by one component stock declining—Boeing. Boeing last week declined by almost 7 percent as fears over a trade war between the US and China put China’s massive airplane order from Boeing in the cross hairs. Last year, Boeing took orders worth $26 billion over the next few years from Chinese airlines. However, the airlines also indicated that they would like to purchase more than 7,000 planes over the next 20 years at a total cost of about $1.1 trillion. Any trade war fears that could impact this deal going forward would have a significant impact on Boeing and we saw just a small adverse reaction in the stock price movement. Volume overall for the week on the three major indexes was below average despite higher than average daily volume on Friday as it was a quadruple witching day for options expiring.
The following were the top 5 and bottom 5 performing sectors over the course of the previous week:
Four of the top five performing sectors last week were classic risk off trades as Utilities, Global Real Estate, Consumer Discretionary and Commodities all turned in flat to positive returns. The increase in Utilities was primarily driven by investors looking for yield as the yields on many fixed income investments declined last week. Semiconductors was the odd mover among the top five performing sectors last week as this sector is normally one of the largest decliners on weeks that the markets decline. However, Intel had a relatively strong week last week, helping to prop up the sector as strong demand for semiconductors continues to be seen around the world. On the negative side last week, Aerospace and Defense was brought down by the poor performance of Boeing, as mentioned above, leading the sector to decline by more than 3 percent. Basic Materials lost the second most last week as fears of global trade wars adversely impacted the sector. Financial related sectors made up the remaining three sectors on the negative side of performance last week as everyone waits to see how much the Fed policy statement and dot plot may change under the new chair.
US fixed income markets all increased last week pushing yields lower across the board. The primary driver of the bond market performance last week was a general lack of inflation being seen in the economic data that was released; more about that below in the economic news section.
The US dollar had an uneventful week, gaining 0.30 percent against a basket of international currencies as traders continue to try to assess the revolving door of employees at the White House and what, if any, impact it could have on the potential trade war and US dollar. The best performing currency last week was found in Venezuela and was the Bolivar, which gained 9.03 percent. While this may sound like a great move higher, it is less than a third of what the currency has lost of the past three weeks as the Bolivar continues to trade in a very erratic fashion. The worst performing currency last week globally was found in Turkey as the Lira declined by 2.78 percent.
Commodities were mixed over the course of the previous week as oil moved higher while all of the other commodities pushed lower:
The GS Commodity index posted no change last week, as gains in oil were offset by losses in other commodities. Oil gained 0.64 percent as the heir apparent to the Saudi King visited several other countries around the world, including the US where he got a firsthand look at the oil shale production that is going on. Gold, Silver and Copper all posted losses last week, declining by 0.75, 1.54 and 1.10 percent, respectively. Soft commodities were down as well last week as Livestock declined 0.92 percent, while Agriculture overall decreased by 0.83 percent and Grains posted a loss of 1.70 percent.
Last week was a mixed week for the global financial markets as 41 percent of the major indexes advanced for the week. Thailand’s SET index posted the largest gain last week of any of the global indexes, advancing 2.05 percent. Russia’s RTS index turned in the worst performance of the week last week, giving up 2.43 percent last week as the UK expelled 23 Russian diplomats over a nerve agent poisoning as well as another suspicious death of a critic of Russian President Putin. Russian President Putin easily won a Presidential election over the weekend, but voter turn-out probably would not have been so great if it were not for the promise of cheap or free food being given out near many of the polling places.
The wild roller coaster movement of the VIX came to an end last week with the VIX only gaining 7.92 percent. It was the first week of the past seven that we did not see a double digit move either up or down on the VIX. With the current VIX reading of 15.80, it implies that a move of 4.56 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.
Economic Release Calendar:
Last week was a full week for economic news releases with the primary focus of the releases being inflation indicators. There were two releases that meaningfully beat market expectations (highlighted in green below) and one that significantly missed market expectations (highlighted in red below):
Data for table from Econoday.com, Bloomberg and Yahoo Finance
Last week, the economic news releases started on Tuesday with the release of the Consumer Price Index (CPI) for the month of February, which came in exactly in line with expectations at 0.2 percent when looking at overall CPI and at the core CPI calculation. On Wednesday, retail sales for the month of February were released and disappointed the markets with overall retail sales posting a decline of 0.1 percent versus the expected gain of 0.3 percent. When looking at retail sales excluding auto sales, the February number looked better, showing a gain of 0.2 percent, still below expectations, which were for 0.4 percent, but at least in positive territory. Also released on Wednesday was the Producer Price Index (PPI) for the month of February, which came in very close to market expectations, both overall and when only looking at the core calculation. Both the PPI and CPI numbers released last week indicate that inflation remains very subdued in the US economy, something the Fed will have to address at this week’s upcoming FOMC meeting, at which they are expected to raise interest rates. On Thursday, the Empire Manufacturing index for the month of March was released and came in significantly above markets expectations with a reading of 22.5, while the market had been looking for only 15. The Philly Fed index, also released on Thursday, fell slightly short of expectations, but remained in solid growth mode and was largely overlooked by the markets. On Friday, two pieces of US housing information, the housing starts and building permits figures, for the month of February were released with both coming in very close to market expectations and having no noticeable impact on the overall markets. Wrapping up the week last week was the release of the University of Michigan’s Consumer Sentiment Index for the month of March (end of February reading), which came in above expectations, positing a reading of 102.0, the highest reading for the index since April of 2004. The strong and unexpected reading from the consumer sentiment index combined with the poor reading from retail sales has some economists concerned that the US economy may be weaker than many people think as everyone waits to see if the tax cuts will have a positive impact on the overall economy.
This week is a slow week for economic news releases, but there are a few releases that could impact the overall movement of the markets. Releases that have the most potential to impact the overall markets this week are highlighted in green:
Data for table from Econoday.com, Bloomberg and Yahoo Finance
This week the economic news releases start on Wednesday with the release of the existing home sales figure for the month of February, which is expected to post a reading of 5.4 million units. Likely overshadowing the existing home sales figure on Wednesday is the conclusion of the March FOMC meeting of the Federal Reserve. This meeting is the first FOMC meeting with a press conference and an expected rate hike for new Fed Chair Jerome Powell. This meeting is also one of the meetings after which the Fed releases their latest rate expectations in the form of the dot plot. The dot plot always draws a lot of attention from Wall Street as the street tries to decipher which dots belong to which Fed officials and what it could mean of the future of Fed rate hikes. Aside from the dot plot, the markets will be very closely watching and listening for any indication of a fourth rate hike being in the cards during 2018. On Friday this week, the February durable goods orders figures are set to be released with expectations of 1.5 percent growth overall and 0.6 percent when excluding transportation. With the poor reading on retail sales that we saw last week, it would not be surprising to see both durable goods orders figures miss market expectations. Wrapping up the economic news releases this week is the release of the February new home sales figure, which, much like the other housing related releases for the month of February, should have no meaningful impact on the overall markets. In addition to the FOMC meeting and press conference that follows, there are three other Fed officials giving speeches next week that the markets will be watching very closely for clues about future Fed actions.
Interesting Fact —Toys ‘R’ Us is closing down
It was announced last week that Toys ‘R’ US will liquidate all its remaining stores after struggling for years to overcome a mountain of debt. The brand, which started in June of 1957, is recognizable to almost all adults that grew up during the 1970’s, 1980’s and 1990’s. The “R” in the logo was designed backwards so that it looked like a child wrote the name. Geoffrey the Giraffe was added to the brand in May of 1965 and remained part of the logo thereafter.
Source: Toysrusinc.com
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