Last week brought new record highs in the S&P 500 and NASDAQ for the first time since last September and a fresh leg down in bond yields. Subdued business and personal spending along with muted inflation data in the Q1 GDP report gave investors confidence that the Fed will remain on the sidelines and drove bond yields lower. Earnings season is in full swing but hasn’t inspired markets one way or the other thus far. Last week’s economic calendar highlights were the U.S. GDP release, durable goods report, and some housing market data along with several non-U.S. reports.
- Ryan Detrick from LPL noted that periods where new highs took place with a six month or more gap in between, returns over the next 12 months averaged 12.9% and 17 of the 18 periods recorded a positive return.
- Nearly 50% of S&P 500 companies have reported. Current blended earnings and revenue growth of 2.3% and 5.1% and beat rates of 77% and 59% are deemed ‘mixed’. Top line of 5.1% would be the slowest growth since Q217 but guidance for the remainder of the year has generally been higher.
- Stoxx 600 (Europe) earnings and sales are +17.5% and +4.3% respectively with financials (+57%) as the upside outlier and real estate/energy on the downside.
- With uncertainty surrounding trade policy clearly weighing on business investment, Chinese President Xi’s speech at the Belt and Road forum was very encouraging. He noted IP, foreign investment, anticompetitive subsidies, and FX policy as top priorities.
- World trade volumes fell 1.9% 3m/3m ending February which caught the attention of global central banks. It was the steepest drop since May 2009.
- Global industrial output has now fallen four consecutive months (by very small amounts), resulting in its longest decline streak since February 2009 - 10 consecutive months.
- Chinese freight traffic, Japan (machine tool orders, retail sales, LEIs), and European consumer sentiment were a few of the more constructive non-U.S. indicators noted last week.
- A POTUS announcement that waivers to countries importing Iranian oil will not be renewed triggered OPEC to announce they will fill that production gap, so oil prices didn’t move materially on the week.
- A 1% move to the upside in the U.S. dollar midweek was the strongest three-day USD move since November. The USD has clearly begun to trend higher and was +0.55% on the week.
- Only a slight positive bias to mutual fund and ETF flows combined with modest AAII bullish sentiment back a constructive contrarian stance on the current equity market rally.
Economic Release Highlights
- Q1 GDP posted a very solid 3.2%, well above the 2.3% consensus and best Q1 in four years. Key contribution drivers were net exports (1.03), inventory add (0.65) and PCE consumer spending growth of 1.2% (0.82). Residential investment and consumer spending on durables detracted while business investment, government spending, non-durables and services where net positives.
- An uninspiring mid week reading in German business sentiment (IFO 99.2) cast a shadow over the European growth outlook.
- The April consumer sentiment reading of 97.2 changed little since mid month.
- March existing home sales (-4.9%m/m, -5.4%y/y) came in at the low end of expectations after an 11.2% surge in February. Importantly, the 3m average has trended up to 1.4%.
- March new homes sales of 692,000 was the best reading since November 2017 likely propped up by falling rates as 30 yr conventional mortgage fell from 4.64% to 4.27% December to March.
- March durable goods report jumped 2.7% aided by strong results in both aircraft (60%) and autos (2.1%). Ex-transportation still managed a respectable 0.4% reading. Core capital goods (non-defense ex aircraft business spending) handily beat expectations jumping 1.3%.