Breakin’ Out to the Upside!

On Friday, the markets closed the week gaining traction. The Dow had 7 days of consecutive growth, rising 2.34%—its largest weekly gain since March. Meanwhile, the S&P 500 rose 2.41%, the NASDAQ jumped 2.68%, and the MSCI EAFE increased 1.41%.

Various factors came together to support the growth. From geopolitical topics to strong corporate earnings, we’ll focus on 3 key developments that drove movement.

1. Energy Shares Boosted by Iran Nuclear Deal Withdrawal

President Trump’s decision on Tuesday to withdraw from the Iran nuclear deal helped push the energy sector higher. With the possibility of renewed sanctions on the horizon, the anticipation of a pullback from global oil supplies helped boost prices. Though oil prices fell from a 3½-year high on Friday, it was the 2nd week of growth, driving energy shares to rise 3.8%.

2. Technology Sector Jumps Amid Strong Corporate Earnings

After the technology sector’s months of stagnation—fueled in part by recent fears over privacy—it is now approaching all-time highs. Since April 25, the information technology sector has increased 9%. The movement is driving many investors to join the rally, while many analysts remain cautious.4 Overall, the growth contributed 3.5%.5

This rally happened on the back of strong corporate earnings. Over 70% of total S&P 500 companies reported earnings growth that exceeded expectations. Last week’s positive reports helped push the index past 50- and 100-day moving averages.6

3. Inflation Remains Steady

The Consumer Price Index (CPI), which measures the price of goods and services, rose only 0.2% for the month in April and 2.5% over the year. These reports both missed and met expectations, respectively.7 The tepid growth caused some investors to worry that the Federal reserve would raise interest rates more quickly, as the U.S. dollar fell and held below its 2018 high.8 Some analysts, however, believe that the missed expectations should ease the Fed’s pressure to fast-track interest rates.9

Looking Ahead

We will continue tracking geopolitical developments—from potential actions against Syria, tariffs on Iran, and preparations for President Trump’s upcoming meeting with North Korea’s Kim Jong-un.10 In addition, key discussions around the American Free Trade Act and trade relationships with China remain on the horizon.11 We also will gain our first insights on how well consumer spending performed in the 2nd quarter.12

If you would like to discuss any developments or gain a clearer understanding of how these issues may affect your portfolio, contact us today. We are always here to help you make sense of your financial life and gain clarity for the road ahead. READY TO GET IN? CLICK HERE FOR CUSTOMER CENTER

ECONOMIC CALENDAR
Tuesday: Retail Sales, Housing Market Index
Wednesday: Housing Starts
Thursday: Initial Jobless Claims, Philadelphia Fed Business Outlook Survey, Bloomberg Consumer Comfort Index

DATA AS OF 5/11/2018 1 WEEK SINCE 1/1/18 1 YEAR 5 YEAR 10 YEAR
STANDARD & POOR’S 500 2.41% 2.02% 13.92% 10.80% 6.99%
DOW 2.34% 0.45% 18.70% 10.43% 6.90%
NASDAQ 2.68% 7.24% 21.04% 16.59% 11.71%
INTERNATIONAL 1.41% 0.45% 10.84% 3.21% -0.37%
DATA AS OF 5/11/2018 1 MONTH 6 MONTHS 1 YEAR 5 YEAR 10 YEAR
TREASURY YIELDS (CMT) 1.68% 2.06% 2.28% 2.84% 2.97%

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

As the Easter Weekend’s Geo-Political Tension Wanes, U.S. Consumer Data Weakens, Gold Rises, Oil Falls

China roared back with a 6.9% year on year Q1 GDP increase, it’s largest since 2015, as its retail and investment activity increased. China’s drivers were housing, infrastructure investment, exports and retail sales improvement. China’s target was 6.5%. China’s rebalancing away from heavy manufacturing and more towards services and consumer demand has not diminished the world’s second largest economy. Indeed, emerging markets are seen to benefit from China’s strong growth data. Rajiv Biswas, Asia-Pacific chief ecnomist at IHS Markit in Singapore stated that, “[t]he whole Asian manufacturing supply chain will get a boost from stronger Chinese growth.” Read more here.

Meanwhile, U.S. inflation took a step back in March simultaneously while retail sales dropped for the second month. So, another mid-year boost in interest rates by the Federal Reserve is now questionable. While the U.S. GDP ratio to national credit is little changed, China’s ration decreased somewhat, given its moderate credit growth since 2015. Still, China’s acceleration is still reliant on its old formula:  growth driven by credit-fueled investment in infrastructure and property. See here. This fact forms the basis for other analysts such as Carson Block, founder of Muddy Waters Research, to posit that China is a massive asset credit bubble risk. Cf. here. Block also warns that he has “never believed in the Chinese GDP data” and also sees a real risk of a U.S. default on its credit obligations.

In other markets, Gold has been climbing on Trump’s weakening dollar, leading analysts to believe that Gold will extend its rally. Jason Schenker, president and founder of the Austin, Texas-based Prestige Economics LLC, sees future U.S. interest rate increases already priced into Gold, and see equities declining especially amid increasing geopolitical risk. Schenker stated Gold broke out above its Bollinger bands, a technically bullish signal. Schenker warned that if the U.S. gets weak Q1 GDP number, equities “are going to take a big hit, the dollar is going to take a big hit, and gold is going to sky-rocket.” Read more here.

The longest rising rig count since 2011 in the U.S. is dropping West Texas Intermediate crude oil below $53/barrel as U.S. output is expected to offset OPEC-led efforts to cut a global supply surplus. Baker Hughes Inc. data shows an additional 11 rigs added just last week. That data plus the increase in shale oil production shows little promise to revive the price of oil in the near future–somewhere in the mid-$40s according to Michael Cohen, Barclay’s head of commodities research. See here.