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.

 

Time to Leave Behind the 2008 Financial Crisis and Look Overseas Again?

Well respected analysts and market participants alike are behaving as if we’ve finally turned the corner on the worst financial calamity of this century, albeit barely getting underway. We are almost ten years post-crisis. Ergo, it may be time to reassess asset allocations. But, it could be a big mistake to merely extrapolate the cyclical trends of the past economic cycles. Some say that re-emergence from burst credit bubbles are different from cyclical recessions. If, as some believe, asset allocation is about finding market asymmetries—that is, areas where the consensus may be wrong and the cost of exposure is low, thus the investment opportunity is mispriced and tilted in your favor, then one such asymmetry is in those tame expectations for inflation. What if inflation exceeds those expectations? Perhaps economically sensitive equities are a way to benefit. Many are starting to look at dividend-paying companies and small to mid-size capitalized stocks to take advantage of high operating leverage to increasing growth and price trends. Many of these equities offering opportunity are appearing in overseas markets. But focus:  what worked in the past may not work again in the future.

New secular drivers may be at play as new nations entering phases of rapid development. Shorter-term changes in politics and policy that marked the current era may beg for a reassessment of one’s portfolio. Many anticipate new policies to spur global growth are in stark contrast to previous policy driven influences such as Quantitative Easing and negative interest rates from 2008-2016. Analysts at Bloomberg expect real GDP plus inflation to improve to roughly 6% growth over the next two years as inflation and real growth increase.  Deutsche Bank analysts think productivity is likely to decline. Well, if low-cost labor will no longer propel productivity and deflation globally, perhaps due to robots filling in every aspect of our economies globally, then one may investigate ways to benefit should inflation exceeds expectations. The natural place to investigate then, is China,manufacturer for the world. And, indeed the Chinese producer price inflation is back in positive territory for the first time since 2012.

So, if US long-term treasuries were the safe-haven for the 2008 deflationary cycle, Lord Abbett analysts suggest that “economically sensitive equities” are the place funds should flow out of bonds to benefit from a return of inflation. They like a focus on dividend-paying companies as dividends grow with inflation over the medium term. They also like small and mid-cap stocks as such tend to have high operating leverage to increasing growth and pricing trends.

They also suggest that assets positively correlated with inflation, negatively correlated with higher interest rates, and relatively low volatility may be another ideal hedge. But, Lord Abbett isn’t thinking of TIPS or commodities. Rather, a combination of inflation index forward contracts anda a short-maturity income fund would provide the best combination of those factors. So, if this strategy sounds appealing, then an inflation focused strategy may be a great approach.

Finally, a strong US dollar weakening, coupled with excessive pessimism caused by political turmoil in Europe and Asia could set the stage for another asymmetry to exploit. Recent economic indicators from overseas (China; Europe) have exceeded expectations and several leading indicators show a broadening of growth around the world, not a weakening. More than 90% of the world’s manufacturing purchasing manager indexes are above 50-showing they are in expansion.

If your portfolio is based on the trends of the past cycles, it may be time to reassess the new world dynamics and consider reallocation according to your risk appetite.

NOTE:  Small-cap and mid-cap company stocks tend to be more volatile and can be less liquid than large-cap company stocks. Due to market volatility, the market may not perform in a similar manner in the future. Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

Financial Services offered through First American National Investment Advisors. Past performance is no guarantee of future results.