Markets Hold Ground Amid Uncertainties

Markets Hold Ground Amid Uncertainties

  • Markets Remain Resilient
  • Fed Eyes Further Rate Hikes

  • Looking Ahead

U.S. and foreign stock markets generally gained ground this week as trade-war fears eased. But we suspect there’s more volatility to come as headline-driven selloffs seem likely to continue battling with rebounds based on fundamental facts and bursts of optimism.

In less than four weeks’ time, we’ve seen the market rise and fall on concerns about inflation, tariffs and trade wars, the ongoing Mueller investigation, Syria and congressional testimony concerning privacy and social media. But fundamentals—earnings, interest rates and economic data—have offset those headline fears, and suggest that rumors of the death of the bull market are greatly exaggerated.

For the year through Thursday, the Dow Jones Industrial Average has declined 0.4%, while the broader S&P 500 index has returned 0.2%. The MSCI EAFE index, a measure of developed international stock markets, is up a fractional 0.1%. 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 dropped 1.7% for the year.

Markets Remain Resilient

While the U.S. stock market was poised to post gains on Monday, the Dow and S&P 500 both suffered a last-hour plunge that erased their advances on the news that the FBI had raided the home and office of one of President Trump’s personal lawyers, Michael Cohen. This new element of uncertainty added another log to the political fire, and it had a plainly negative market impact.

Despite the negative headline, markets were resilient. Asian and European markets traded up on Tuesday thanks mostly to flowery words from Chinese President Xi Jinping about opening up his country’s economy and trade. Of course, such words are easier to utter than enact. But the comments put trade-war concerns on the back burner for now.

First-quarter earnings reporting season began this week with expectations for the highest quarterly growth rate in seven years. While earnings drive stock prices over time, on any given day, emotions can trump fundamentals. You’ve heard us say it before, but it bears repeating: Fear-based selling creates the wealth-building opportunity to add to our best ideas at a discount.

Fed Eyes Further Rate Hikes

Minutes from the Federal Reserve’s March meeting released this week—the first presided over by new Chair Jerome Powell, at which policymakers increased the fed funds rate by 0.25% to a 1.50%–1.75% range—revealed a Fed that remains on course to gradually raise interest rates. That’s not a bad thing in our view. Interest rates remain historically low, and one or two more incremental hikes in 2018 would be reflective of central bankers’ strengthening economic outlook.

Remember, the Fed’s two main objectives are to support maximum employment and stable prices for goods and services. And where do we stand? Unemployment remains low, clocking in at 4.1% for the sixth consecutive month. Inflation is hovering around 2%, the Fed’s professed target level. Additionally, continuing to increase short-term interest rates now leaves policymakers room to cut rates when the next recession comes. Today they have the opportunity to raise interest rates at the same time as Congress is providing fiscal stimulus to the economy via tax cuts. That’s not an opportunity the Fed is going to, or should, pass up.  

Looking Ahead

After hearing from a few bellwether banking companies this week, next week we begin to get the real flow of first-quarter earnings reports. Reporting next week will be Bank of America, JB Hunt, Netflix, Charles Schwab, CSX, Goldman Sachs, IBM, Johnson & Johnson, Abbott Labs, Alcoa, American Express, BMW Capital, Cohen & Steers, Morgan Stanley, U.S. Bancorp, Bank of New York Mellon, BBT, E*Trade, General Electric, Honeywell, Procter & Gamble, Schlumberger, Stanley Black & Decker, Waste Management and more.

We’ll also get data on retail sales and the housing market as well as a look at the Fed’s Beige Book of anecdotal economic reports from around the country.

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Please note: This update was prepared on Friday, April 13, 2018, prior to the market’s close.

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