05/15/2018
After two months of rangebound trading, stocks made a decisive move higher last week. In its best weekly advance since mid-February, the S&P 500 rose 2.4 percent and ended the week above its 100-day moving average for the first time since mid-March. At the sector level, the push higher enjoyed widespread participation, led by energy, financials, industrials, and tech, while only the defensive staples and utilities fell.

One week does not make a trend, but there has been some encouraging news lately that contributed to the better tone, extending back to the previous Friday’s favorable jobs report. This past week it was a rather moderate April consumer price report. And the worrisome rise in bond yields has recently leveled off. Despite two daily closes above 3.0 percent, the yield on the ten-year treasury note has ended each of the past four weeks at yield of either 2.96 or 2.97 percent. The dollar also stopped climbing, at least for now, as the U.S. Dollar index (DXY) ended the week unchanged after losing ground following the Consumer Price Index (CPI) report. And the CBOE Volatility index (VIX) fell back to 12.7 from its 14.8 close last week.

The steady rise in the price of oil over the past month has contributed to a 14 percent rise in energy stocks since the beginning of April, well ahead of the 3.3 percent gain in the S&P 500 during the same interim. It has also contributed to an increase in second quarter earnings growth expectations for the sector to 127 percent from 116 percent at the start of the quarter, and a 12 percent rise in full-year expectations to 85 percent, according to Factset.

Most of the rise in oil can be explained by rising demand in a strong global economy and production discipline among OPEC and friends. However, a new level of uncertainty has been injected into the oil patch by the president’s announcement that the U.S. would leave the Iran nuclear accord. The question is whether and how much Iranian oil might leave the market and what will be the production response elsewhere. It is impossible to say where things are headed, but the possibility exists that prices could rise significantly higher. The results of Saturday’s elections in Iraq will also influence the extent of Iran’s influence in the region, although preliminary results indicate victory for the west’s preferred candidate for Prime Minister, the incumbent Haider al-Abadi.

Already, the impact of higher oil prices is exerting its influence on headline consumer inflation. The CPI registered a 2.5 percent year-over-year rise in April, with the energy component rising 7.9 percent. And the impact of energy is about to deteriorate further. So far this quarter, West Texas intermediate crude, currently trading at $70.70 a barrel, has averaged $67.29, compared to $49.79 in last year’s second quarter. In last year’s third quarter it averaged $49.49. So, unless there is an unexpected reversal, the year-over-year comparisons for the energy component of headline inflation get much easier, possibly 35 percent easier, or more. The core rate has also climbed, but until there is greater evidence of sustainable wage inflation, the rise is expected to be moderate.

But the headline rate cannot be ignored because of its impact on consumer purchasing power. Gasoline prices have been rising. According to AAA, the national average for a gallon of regular unleaded is $2.87. One month ago it was $2.68, and one year ago it was $2.34. If the U.S. economy is going to accelerate from the modest pace of the first quarter, the consumer spending rate will need to rise. In the first quarter, personal consumption rose by a sluggish 1.1 percent, after rising 2.8 percent in 2017. It should be noted, however, that in each of the past two years, first quarter consumption was the slowest of the year. Retail sales fell in January and February, before rebounding sharply in March. April retail sales are scheduled for release on Tuesday and are expected to have risen once again.

And although more than 90 percent of first quarter earnings results have already been announced, this week contains a good look at retail activity in the first quarter with earnings reports from Home Depot, Walmart, Macy’s, Nordstrom, and JC Penney. Two other prominent names scheduled to report this week are Cisco and Deere. Also on this week’s economic calendar are industrial production, housing starts and permits, and leading indicators.

The economic news flow in the week ahead will be dominated by the consumer sector. But trade will also be high on the radar, as this week represents a soft deadline in order for Congress to weigh in on policy changes. Chinese Vice-premier Liu He may also visit Washington as early as this week to continue trade discussions, although the timing of his visit is uncertain. Whether equities can advance for the second week in a row, despite the potential distractions, will depend heavily on the strength of the consumer. If the evidence this week shows further acceleration from the weak consumption pattern at the start of the year, and dialogue continues to supplant confrontation on the geopolitical front, the chances are good.

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.

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 U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
The Consumer Price Index (CPI) 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.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
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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