General market news
- Rates moved lower last week, as the 10-year Treasury hit a high of 2.61 percent the previous week, moved to as low as 2.49 percent late last week, and opened at 2.52 percent early Monday. The curve remains flat and inverted on the short end. Continued volatility is expected in the weeks and months ahead.
- Both the S&P 500 and the Nasdaq Composite hit all-time highs last week. Further, we moved deeper into earning season; thus far, the numbers do not appear to be as bad as initially feared. FactSet has reported that 77 percent of firms that have reported have beaten their consensus EPS estimates. Still, those that have missed the mark have been punished, with Intel (INTC), 3M (MMM), Tesla (TSLA), and UPS (UPS) all falling at least upper single digits. Those that fared well included Microsoft (MSFT), eBay (EBAY), and Ford (F).
- We did see a few themes play out, including auto weakness and headwinds from Europe and China. It will be interesting to see if these themes continue throughout the quarter and if the stimulus in both regions will aid a rebound going forward.
- Last week saw the release of a large number of important economic updates, many of which came in better than expected. The week began with the release of March’s existing home sales data, which declined by 4.9 percent. Although this decline was larger than expected, existing home sales in February grew by more than 11 percent, so this could be just a brief pullback.
- On Tuesday, new home sales came in much better than existing home sales, with 4.5-percent month-over-month growth. This was against expectations for a 2.7-percent decline, so it was a pleasant surprise for economists.
- On Thursday, March’s durable goods orders also handily beat expectations, with 2.7-percent growth against projections for a more modest 0.8 percent.
- Finally, on Friday, the first estimate of first-quarter gross domestic product was released. The economy grew at an annualized rate of 3.2 percent in the first quarter, far surpassing economist expectations for 2.3-percent growth. The key factors that led to this outsize growth were higher-than-expected exports and an increase in inventories. These two factors alone contributed to more than half of the growth in the first quarter and are unlikely to continue for the rest of the year.
MSCI Emerging Markets
Fixed Income Index
U.S. Broad Market
Source: Morningstar Direct
What to look forward to
This week is a very busy one for economic data, with a number of key reports. It starts on Monday, with the personal income and spending reports. We should see accelerating growth in income, up from a gain of 0.2 percent for February to 0.4 percent for March, on faster wage growth. Faster income growth would be a positive sign. The personal spending report will be a bit different than usual, as both February and March figures will be published at the same time in a final catchup from the government shutdown. February spending growth is expected to come in at 0.1 percent, while March is expected to be much stronger at 0.7 percent on the recent strong retail sales report. These results would signal faster consumption growth after a slowdown in the first quarter. If the numbers come in as expected, the rebound would be consistent with renewed confidence and would be a positive sign.
On Tuesday, the Institute for Supply Management (ISM) Manufacturing index is expected to pull back slightly, from 55.3 for March to 55 for April. This is a nominal decline and would suggest that a slowdown in global demand has not yet significantly damaged the U.S. manufacturing sector. Plus, there may be some upside here as global conditions seem to be improving. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this would be a reasonably healthy figure, suggesting continued growth.
Also on Tuesday, the Conference Board’s survey of consumer confidence is expected to show that confidence rose from 124.1 in March to 126.1 in April. This rise would signal the rebound from the drop after the government shutdown continues, which would be positive. But there may be some downside risk on the recent rise in fuel prices, which historically has hurt confidence levels.
On Wednesday, the Federal Open Market Committee will conclude its regular policy meeting with a statement and press conference. No meaningful action is expected from this meeting, but markets will be watching for hints about whether the Federal Reserve’s concerns about the economy may lead to rate cuts.
On Friday, the ISM Nonmanufacturing index is expected to increase slightly, from 56.1 in March to 57.2, on strong domestic demand for services. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this would be a very healthy figure, suggesting continued growth.
Finally, on Friday, the employment report is expected to show that job growth pulled back slightly from 196,000 for March to 181,000 in April. There may be some downside risk here, which could pull the shorter-term averages down further and indicate job growth is finally slowing. The unemployment rate is expected to hold steady at 3.8 percent. Wage growth is expected to pick up from 0.1 percent to 0.3 percent, which would take annual growth from 3.2 percent to 3.3 percent. If the numbers come in as expected, it will provide more assurance that despite recent weakness, the economic fundamentals remain sound.
Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.