07/16/2018
Despite the distraction of the administration’s incipient trade war, U.S. equities have quietly managed to grind higher over the past few weeks. The S&P 500 index climbed 1.5 percent last week for the second week in a row. And since briefly piercing its 200-day moving average on April 2, the index has risen 8.5 percent, and now sits at its highest level since February 1, up 4.8 percent on the year. During the most recent two-week stretch each of the index’s eleven sectors are positive, but it has been the healthcare and technology sectors that have led the way, followed by telecom, consumer discretionary and industrials.

Clearly, investors have chosen to put aside for now the possible ramifications of a trade war and focus on domestic fundamentals. Despite a mixed reception for bank stocks at the start of earnings season last week, consensus earnings, plus the usual percentage of earnings beats, translates into expectations for aggregate second quarter earnings growth of between 20 and 25 percent. Second quarter GDP growth expectations have also edged higher to 4.0 percent, according to Bloomberg. The first estimate is scheduled for release on July 27. And although the Consumer Price index in June rose at its fastest pace in six years at 2.9 percent, with the core rate at 2.3, there seems to be little fear that inflation is a serious concern.

The Fed’s preferred price measure, the Personal Consumption Expenditure (PCE) deflator, in May rose at a twelve-month rate of 2.3 percent with a core rate of 2.0, and the Fed sees it rising at a full-year rate of just 2.1 percent this year as well as in each of the next two. In fact, the highest estimate among the members of the Federal Open Markets Committee (FOMC) is 2.2 percent this year and 2.3 percent in the following two years. Fed Chair Powell testifies before Congress this week.

The Tight Yield Curve and Rising Equity Prices Look Familiar

Bond yields have been mired in a trading range during the full extent of the move in stocks dating back to February 2. The yield on the ten-year Treasury note closed that day at 2.84 percent. Last Friday it closed at 2.83 percent. And despite a brief spike to 3.11 percent on May 17, has mostly traded in a tight ten basis point range between 2.80-2.90 throughout. Of course, the two-year note yield has climbed by 43 basis points to 2.59 percent in that time, flattening the yield curve and raising concerns about slowing growth. But the Fed has deflected worries about the signal from the yield curve, pointing instead to the steeper slope of the short forward curve as more predictive. The spread between the two and ten-year notes is currently 25 basis points, its tightest in eleven years.

There is historical precedence for similar tightness that was nevertheless accompanied by strong equity markets. Towards the end of the long bull market of the 1990s, the 2-10-year yield curve traded consistently below 25 basis points and yet stocks continued to rise. Between the end of the third quarter 1997 and year-end 1999 the 2-10-year spread averaged 18 basis points and the S&P 500 rose by 55 percent. Of course, the internet bubble was well underway, and the result was painful once the yield curve did ultimately invert in early 2000 and stocks rolled over. How analogous that experience is to today’s market remains to be seen.

Investors Keeping an Eye on Retail Sales, Industrial Production and China’s GPD Growth

Retail sales and industrial production headline this week’s economic calendar, which also includes reports on housing starts and leading indicators. Barring any surprises on the political front, this week’s focus will be clearly on earnings, however. Of particular interest will be what management teams have to say about the impact of trade tensions.

Elsewhere, China reported solid second quarter year-over-year GDP growth of 6.7 percent, in line with expectations. It also reported retail sales activity that was slightly better than expected, while industrial production slowed somewhat.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
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 Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in CPI are used to assess price changes associated with the cost of living.
Past performance is not a guarantee of future results.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
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.
Indexes are unmanaged and are not available for direct investment.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
Past performance is not a guarantee of future results.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
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.
Indexes are unmanaged and are not available for direct investment.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.