A holiday shortened week with a relatively light economic and corporate earnings calendar left equity and commodity markets slightly higher while interest rates were largely unchanged.  Equity market volatility (VIX) continued to settle from the 37.3 peak on February 5 to 16.5 by the end of the week. Technology stocks led the way last week alongside energy companies who benefited from a 3% rally in oil prices.

Market Anecdotes

  • U.S. equity indices are up 5%-6% from the correction low but are still 3%-4% below the 1/26 peak.  Growth stocks (NASDAQ 100) have recovered more quickly, now only 1.6% below the January high, reflecting appetite for higher growth names.  The FAANGs made a new 2018 high on Friday.
  • Federate notes that from the 2/11/16 (‘16 low) through 1/26/18 the S&P was up 57%.  The forward P/E rose to 18.6 from 14.8 during that period, before plunging to just above 16 in the first week of February.
  • Earnings season wrapped up last week.  S&P 500 4Q earnings turned in 14.9% growth, which would be its best mark in over six years.  69% of companies beat earnings estimates which is the best beat rate since Q3 2006 and 73% beat revenue estimates, the best beat rate since Q4 2004.   Company earnings guidance (% raised vs % lowered) was the strongest since Q3 2010.
  • FOMC minutes of Janet Yellen’s last meeting as Fed chair reflected a confident economic outlook and confidence that inflation will reach the Fed’s 2% target by 2019.  A relatively unknown quantity, Jerome Powell, now takes the helm to navigate the economy.  The Fed tone in speeches since the January meeting suggests a shift from a hawkish tone toward a neutral, or even dovish tone.
  • It is important to remember that the January FOMC meeting was not privy to the January jobs report which contained robust wage and inflation data which seemed to be the catalyst for the VIX crisis/market correction.
  • The 10yr U.S. Treasury has just recently broken its long term technical downtrend that has been in place since the late 1980’s.  The 10yr has moved from 2.4% to 2.9% since the GOP tax plan was passed on 12/22. The current 8% drawdown in the 10yr is the worst since 2009 and the fourth worst in the past 20yrs.
  • Preqin reported that private credit managers worldwide held a combined $236 billion of committed but unspent capital as of Dec. 31.  Due to a more competitive marketplace for senior and unitranche commercial capital, only 11% of the $107 billion in U.S. private credit funds raised last year was for mezzanine, compared with 33% in 2016.
  • The tax and budget stimulus has JP Morgan upgrading its U.S. growth forecasts and lowering its jobless rate target to a 50-year low (3.2% in 2019).  They also raised their deficit projection relative to GDP to a 50year high (5.4%).

Economic Release Highlights

  • Weekly jobless claims of 222,000 pushed the four-week moving average to a new all-time low dating back to 1967.  Nothing but good things continue to come from the job market.
  • Existing home sales fell 3.2% unexpectedly, registering the lowest January mark since 1999.  Even though supply increased 4.1% from December, lack of choice continues to plague the market.  There was 3.4 months’ worth of home inventory on the market in January which is 9.5% lower than last January and near the 19 year low posted in December.
  • A surge in services and manufacturing pushed the February Flash PMI up to a 27-month high of 55.9.  Input prices intensified, recording their sharpest rise since July 2013 and prices charged inflation increased to their highest level in 3.5 years.