Facts Trump Trade-War Fears
- Job Gains Persist
‘Negative’ Quarters Nothing New
- Looking Ahead
The trade tariff tit-for-tat between China and the U.S. dominated headlines and drove Wall Street sentiment for much of this week. The public bluster of tariff threats sparked daily volatility and a pattern of selling on the latest headlines followed by a rebound once fears were put back in the trade-war bottle. A tariff skirmish isn’t the same as a trade war, and both sides are jockeying to maximize their leverage in the backstage negotiations where the real policy will be decided, a process that will likely stretch on for months. With so many unknowns, we’ll wait for results before considering any trade-related trades.
So long as fundamentals continue to hold their growth ground—as they did this week—and the upcoming earnings reporting season delivers on expectations for another strong quarter, fear-based dips may well give way to fact-based gains. We expect daily volatility to remain a market fixture as we head through the summer into a contentious U.S. midterm election season.
For the year through Thursday, the Dow Jones Industrial Average has dipped 0.3%, while the broader S&P 500 index is essentially flat, up just 0.1%. The MSCI EAFE index, a measure of developed international stock markets, is down 1.1%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.18% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.8% for the year.
Jobs Gains Persist
Job creation continued in March, hitting a record 90th consecutive month. The U.S. economy added 103,000 jobs while the unemployment rate held at 4.1% for the sixth month in a row. Though fewer jobs were added than expected, the wage growth we’ve been waiting to see picked up, rising 2.7% from the same time last year. And while the headline unemployment figure remains at an 18-year low, we’re starting to see more people coming off the sidelines to look for work. The “U-6” unemployment rate, which measures people in part-time work or who’ve given up looking for a job, fell to 8.0% last month from 8.2% in February.
More people working means more paychecks and more dollars propelling our consumer-driven economy on its expansionary course. Data on sentiment among service industry providers remained elevated in March, supporting that view. The Institute for Supply Management’s Business Activity index, which hit one of its best readings in over 20 years in February, fell slightly in March, indicating the economy remains solidly in expansion mode.
In sum, this week’s reports reflect the fact that fundamentals support growth.
‘Negative’ Quarters Nothing New
The financial press has been making some hay over the fact that the first quarter of 2018 was the “first negative quarter” for the stock market in the last 10, taking us back to the third quarter of 2015. So what? A negative quarter is nothing in the long run, especially when the declines are marginal—as they were between January and March. Plus, the trouble with the focus on this first quarter is that it’s specifically the first negative calendar quarter, as if investors only act relative to the calendar.
Negative quarters are actually quite common if, instead of looking only at the calendar, you examine rolling three-month periods. We had a negative three-month stretch ending in October 2016—certainly more recent than the third calendar quarter of 2015. In fact, if you look at the almost 700 three-month periods since the S&P 500 index’s 1957 inception, you’ll find that a bit more than one of every three “quarters” posted a loss.
If you’re really looking for something “special” about the first quarter of 2018, how about the fact that both stocks and bonds ended the three-month s in the red? Analyzing every three-month period since the creation of the Bloomberg Barclays U.S. Aggregate Bond index in 1976 shows that it is unlikely, but not unheard of, to see both underwater for a three-month stretch—it happens less than 10% of the time.
The declines in both the stock and bond markets in the first quarter don’t make us question our belief in the beneficial role of bonds one iota. Just the opposite—the fact that a simultaneous dip like this occurs so rarely further backs up our view of bonds’ critical purpose as ballast against stock market declines in a well-diversified portfolio.
Next week brings reports on small business confidence, inflation, job openings, consumer credit and the minutes from last month’s Federal Reserve meeting. We’ll also see the onset of first-quarter earnings reports from banks such as Citigroup, JP Morgan Chase and Wells Fargo. It will take a couple of weeks, but by April 27 we’ll have heard more than enough earnings reports to call the trend.
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Please note: This update was prepared on Friday, April 6, 2018, prior to the market’s close.
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