The S&P 500 fell over 5% last week for the second time this year as markets grew anxious about U.S. maneuverings toward trade protectionism, potential technology sector regulation stemming from Facebook data improprieties, and a downbeat tone of recent Eurozone economic data. Global proxies of technology, financials, and healthcare bore the brunt of the selling despite a relatively encouraging global growth backdrop. Oil prices rallied sharply, yields moved sideways, and Powell’s first FOMC meeting was entirely uneventful.
- POTUS unilaterally proposed tariffs on $60b of Chinese goods and China responded with retaliatory tariffs of $3b on U.S. goods. While the political and negotiation posturing of these moves are very impactful, the actual cost push impact is likely to be very muted at these levels.
- Fed Chair Jerome Powell impressed Fed watchers at his first FOMC press conference. He communicated an expected 0.25% rate hike and was relatively dovish on balance.
- Rising Treasury yields and widening spreads on investment grade credit have U.S. corporate bonds at their highest yields since 2011. New issues will be met with a higher cost of capital.
- An interesting facet of last week’s stock selloff is that 10yr U.S. Treasury yields rose (prices fell) while stocks fell. This suggests a tone change where market participants are signaling inflation is revived, hence firm yields even in the face of stock market losses.
- Facebook (FB) fell over 7% in a single day last week on a revelation of potential data abuses. We’ll avoid commenting on the validity of concerns but will note that when unregulated, controversial, and highly profitable companies are the subject of strongly worded letters from U.S. Senators, there is reason to be concerned.
- Fiscal stimulus has the U.S. Treasury department ramping up debt issuance to record levels to pay for approved budget outlays and tax cuts which started taking effect in January’s withholdings. The past 4 weeks have brought a record $747b in bills to market and more record issuance is most certainly coming down the road.
- The S&P 500 closed the week only 3 points above its 200-day moving average. It has remained above that level for 438 days, one of only six occurrences since 1928 of over 400 days above 200 day moving average.
- Bespoke notes the distinct shift in market tone since January 26th. There were zero 1% market moves in the 60 days leading to 1/26. Now we’ve seen 17 1% moves in the 40 days since.
- Since POTUS steel tariff announcement, small caps (-3.6%) have had a clear performance advantage over large caps (-6.7%), the former being viewed as less vulnerable to tit for tat trade wars.
- Sector technicals and market breadth have broken down materially over the past week. 8 of 11 sectors now have less than 20% of their stocks trading above their 50 day moving averages.
Economic Release Highlights
- The Conference Board’s index of leading indicators jumped 0.6% in February and is on its best trend line in seven years, typically a very encouraging sign for 2018 economic growth.
- February existing home sales of 5.54M beat expectations, rising 1.1% while February new home sales of 618m was in line but came with upward revisions to December and January.
- February durable goods orders were exceptionally strong, rising 3.1%, reflecting a strong factory sector. New orders and core capital goods are up 8.9% and 8.0% yr/yr respectively.