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Week in Review

Week Ending: Friday, March 23, 2018

Recap & Commentary

U.S. equity markets, as measured by the S&P 500, dropped 6% last week, the worst week since January 2016, leaving stocks down 10% from record highs reached this January. A flight to quality pushed Treasury prices slightly higher, resulting in the 10-Year Treasury yield ending the week at 2.83%, slightly lower than where it began.

The threat of proposed tariffs spilling into a trade war between the U.S. and China, the world’s two largest economies, rattled investors and the Dow fell more than 1,000 points on Thursday and Friday combined. With U.S. tariffs not being implemented until the end of April at the earliest, there is still a chance that the two sides will use this time to negotiate a more constructive resolution.

Newly-appointed Federal Reserve Chairman Jerome Powell held his first press conference on Wednesday following the Fed’s decision to raise short-term rates by 0.25% to a range of 1.5-1.75%. His performance received mixed reviews but left the markets with a clear understanding that the Fed will continue to move forward with monetary tightening, his comments pointing towards four hikes this year, as opposed to the prior outlook of just three.

Congress passed a $1.3T budget deal in the 11th hour on Thursday to fund the U.S. government, which was scheduled to run out of money on Friday. The President signed the bill, though he expressed his dissatisfaction, which will fund the government through the remainder of the fiscal year (October), thereby removing the near-term threat of additional government shutdowns.

While a -6% pullback in the week isn’t positive, fundamentally, the foundation of the bull market remains intact. Economic conditions continue to improve both at home and abroad, and corporate earnings are strong. The daily swings we’ve seen are likely indicative of continued price volatility to come, as the market wades through headlines working to discern what is meaningful, versus what is noise. 

Economic Bullet Points

Single-family home sales led Existing Home Sales higher for the month, lifting the Y/Y rate out of the negative column to 1.1%. The gain in sales wasn’t a product of price concessions, as the median home price rose 0.4% M/M to $241K, up 5.9% on the year. New Home Sales rose more slowly than expected, up just 0.5% Y/Y. Two positives in the report, however, were a much needed rise in supply and prices that are beginning to show traction. Sales, whether for new homes or existing, have been met with similar headwinds, including a lack of supply and rising mortgage rates.

Factory sector data, as measured by Durable Goods Orders, appears to be quite strong, up 3.1% for February versus expectations of a 1.7% gain. Core capital goods orders surged ahead of even high-end estimates. Related shipments rose as well, which will give a boost to the business investment component of first-quarter GDP. Y/Y growth rates are moving from mid-single digits to high-single digits, pointing to a contribution from the sector to overall employment growth and GDP growth.

Employers continue to hold onto their employees, an indication that labor demand is very strong. Jobless Claims, though slightly above expectations in the week, remain near historic lows.

Of Note

The U.S. government ran a $215B budget deficit in February 2018. In 2007, the budget deficit for the entire fiscal year was $161B. Until fiscal year 1986, the US government had not recorded an annual deficit as high as $215B. 

Market Indices Week of 3/23

S&P 500                        -6.0%

Russell 2000                -4.8%

MSCI EAFE                   -2.6%

MSCI EM                       -3.4%

Commodities                 0.1%

Barclay’s Agg.               0.0%

US Dollar Index           -0.9%

10-Yr Yield                    2.83%

WTI Oil ($/bl)                  $66

Gold ($/oz)                  $1,347

The Week Ahead

  • Case-Shiller HPI
  • GDP
  • Consumer Confidence
  • Consumer Sentiment
  • Personal Income & Outlays
  • Jobless Claims
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