Interest Rate and Trade Concerns Cast a Shadow Over Stocks
We continue to believe that stocks can move higher, as economic growth accelerates from the modest first quarter and earnings growth remains strong, even though the rerating of earnings expectations following the passage of tax reform had been mostly discounted by the January rally. As it turns out, however, actual earnings this quarter are exceeding even those lofty expectations. According to Factset, by the end of March earnings expectations for the first quarter had risen to 17 percent. And as recently as last week, those expectations had edged higher to 18 percent. But now, after some better than expected results mostly from technology stocks, earnings are expected to grow by an astounding 23 percent. It seems unlikely that results that strong had been fully discounted by the January move, but that still has not been enough to pull stocks higher, suggesting that worries over trade and interest rates must recede to lift the cloud over stocks.
GDP and Inflation Ratchet Higher
Last week we learned that GDP growth in the first quarter grew by an estimated 2.3 percent. And although that result continued the pattern of relatively weak performance to start the year, it was better than the 2.0 percent Bloomberg consensus. Improvements in both trade and inventories from the previous quarter were not enough to offset weakness in personal consumption, particularly in automobile sales. But compared to the 1.2 percent pace of growth in the first quarter of 2017, and 0.6 percent in 2016, this year’s performance looks rather healthy overall.
Also of note, however, was an elevated sequential core inflation reading of 2.5 percent, the highest in seven years. The Employment Cost index was notably firm. This week’s Personal Consumption Expenditure (PCE) report for March is expected to show year-over-year core inflation of 1.9 percent, well up from 1.6 percent last month, as a negative reading from last March is washed out of the calculation. And while that is still below the Fed’s long-term target of 2.0 percent, it would represent the continuation of a steady rise in core inflation that began last September.
The anxiety over the rise in interest rates reached a fever pitch last week as the yield on the ten-year note broke above 3.0 percent for the first time in five years. Yet, despite some forecasts to the contrary, the world did not abruptly come to an end. And by the end of the week the yield had receded to 2.96 percent, unchanged from the previous week. The 3.0 percent threshold is, by itself, not particularly threatening to the pace of economic activity. But it does represent the piercing of a psychological, and perhaps technical barrier that captures investor attention. Of greater importance is whether that yield continues to climb, and how quickly.
On Tap This Week: April Jobs and more Trade Talk
This week’s economic calendar will have a lot to say about that, in the near-term at least. The April jobs report on Friday is expected to show the creation of a robust 190,000 new non-farm jobs and push the unemployment rate down to 4.0 percent. Average hourly earnings growth is expected to be unchanged from last month at 2.7 percent year-over-year, and anything stronger than that may cause interest rate anxiety to rise. The Federal Reserve also meets this week, although little change is expected after having raised the overnight rate in March. ISM reports for April are also scheduled. And, there is still a long way to go in earnings season.
On the trade front, the U.S. delegation, led by Treasury Secretary Mnuchin, travels to China to try and resolve disputes between the two countries. Few expect significant progress, though dialogue is welcome. It is always possible that trade relations deteriorate further, but few expect the outbreak of a more serious trade war as it’s not in anyone’s best interest.
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Past performance is not a guarantee of future results.
S&P 500 Index: Is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The personal consumption expenditure (PCE) measure is the component statistic for consumption in gross domestic product (GDP) collected by the United States Bureau of Economic Analysis (BEA).
The Employment Cost Index is quarterly report from the U.S. Department of Labor that measures the growth of employee compensation (wages and benefits). The index is based on a survey of employer payrolls in the final month of each quarter.
GDP, inflation, employment report and earnings growth data is released by the United States Bureau of Economic Analysis (BEA).
The ISM manufacturing report is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.
The information and opinions in this article are compiled from third party sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor.
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- Chief Market Strategist, Ameriprise Financial
- More than 30 years of experience in the investment management industry
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