Day Traders Diary

3/31/17

The stock market secured its best first quarter performance in four years on Friday, but it did so in a rather spiritless manner as the major averages held close to their unchanged marks from start to finish. The S&P 500 (-0.2%) and the Dow (-0.3%) settled with modest losses while the Nasdaq finished flat. For the quarter, the S&P 500 increased 5.5%.

Seven sectors settled within 0.3% of their respective flat lines. The remaining groups--financials (-0.7%), energy (-0.4%), telecom services (-0.5%), and real estate (+0.5%)--didn't do much to distinguish themselves from the pack, but in a day light on activity they're worth noting. 

The rate-sensitive utilities (+0.3%) and real estate (+0.5%) spaces settled atop the day's leaderboard as comments from several Fed presidents increased buying interest in the Treasury market, which left yields modestly lower. New York Fed President William Dudley (FOMC voter), Minneapolis Fed President Neel Kashkari (FOMC voter), and St. Louis Fed President James Bullard (non-FOMC voter) laid the groundwork for the Federal Reserve to shift its focus from rate hikes to reducing its balance sheet. Specifically, Mr. Dudley said that the Fed could pause rate hikes while running off its balance sheet.

Shorter-dated issues saw the biggest increase in demand with the 2-yr yield (1.25%) closing four basis points lower while the benchmark 10-yr yield (2.40%) lost only two basis points. The buying steepened the yield curve, but that did little to help the financial sector (-0.7%) as the group closed with the telecom services space (-0.5%) at the back of the pack.

Crude oil achieved its fourth consecutive advance, rising 0.5% to $50.56/bbl. However, the energy sector (-0.4%) failed to capitalize on the positive performance, extending its first quarter loss to 7.3%.

On the corporate front, Amazon (AMZN 886.54, +10.20) put together another solid performance, climbing 1.2% to another fresh record high and extending its weekly gain to 4.8%. However, its peers failed to respond, evidenced by the 0.8% decrease in the SPDR S&P Retail ETF (XRT 42.24, -0.35).

On the data front, investors received a slew of economic reports, including February Personal Income, February Personal Spending, February Core PCE Prices, March Chicago PMI, and the final University of Michigan Consumer Sentiment reading for March:

February personal income rose 0.4%, which is in line with the Briefing.com consensus of 0.4%. Meanwhile, February personal spending increased 0.1% while the Briefing.com consensus expected a reading of 0.2%. January Personal Income was revised to 0.5% (from 0.4%) while January Personal Spending was left unrevised at 0.2%. Separately, Core PCE prices for February rose 0.2% (Briefing.com consensus 0.2%). The January reading was left unrevised at 0.3%.

While the report showed income growth, the uptick in the personal savings rate suggests that consumers have a somewhat cautious outlook. Furthermore, the decline in real PCE underscores the fact that overall economic growth remains subdued.

Chicago PMI for March increased to 57.7 from 57.4 in February while the Briefing.com consensus expected a reading of 55.8.

The key takeaway from the report is that four of five components showed improvement while Employment receded.

The final reading of the University of Michigan Consumer Sentiment Index for March declined to 96.9 (Briefing.com consensus 97.6) from 97.6 in the preliminary reading.

The key takeaway from this report is that a sharp partisan divide that was visible in the preliminary reading, remains in place. Respondents who identified as Democrat expect an imminent recession, higher unemployment, lower income gains, and faster inflation. Conversely, Republicans expect strong growth in incomes and job prospects, coupled with lower inflation.

On Monday, investors will receive March ISM Index (Briefing.com consensus 57.0) and February Construction Spending (Briefing.com consensus 1.0%) at 10:00 ET. Also of note, March auto & truck sales will be released throughout the day.

Nasdaq Composite +9.8% YTD

S&P 500 +5.5% YTD

Dow Jones Industrial Average +4.6% YTD

Russell 2000 +2.1% YTD

Week in Review: Green Once Again

After falling 1.4% last week, the S&P 500 rebounded, rising 0.8% for the week. The benchmark index wrapped up a solid first quarter (+5.5%), which was overshadowed by an even better performance from the Nasdaq, which gained 1.4% for the week, extending its first quarter gain to 9.8%.

There's no question that the GOP's failure to compromise on health care reform last Friday left an impression on this week's activities, maybe most notably on Monday. Investors kicked off the week cautiously as it remains largely unclear how the failure to bring the American Health Care Act to a vote will impact the widely-anticipated tax reform legislation.

In addition, investors are also starting to question the new administration's ability to find middle ground with some of the more conservative Republicans in Congress. This issue will certainly manifest itself in the debate on tax reform as the party remains divided on the need to include a border adjustment tax in the overall fiscal overhaul.

Despite the looming uncertainty, the S&P 500 bounced off its 50-day moving average on Tuesday to post its best performance of the week. House Speaker Paul Ryan and Majority Leader Kevin McCarthy stoked the fire by leaving the door open to revisiting health care reform. This was contrary to earlier remarks from President Donald Trump, who vowed to move to tax reform without looking back. For investors, if the GOP can cut health care costs, the savings could support a larger tax break.

Crude oil took center stage in the middle of the week following a bullish inventory report from the EIA and rumors that the OPEC/non-OPEC production cut may be extended beyond June. The energy component went on a three-day rally while the energy sector helped the stock market finish slightly higher on Wednesday and Thursday.

Equities closed out the week, and the quarter, with a flat showing on Friday that kept the S&P 500 inside an eight-point range.

A week of mostly hawkish talk from Federal Reserve officials brought rate hike expectations back to levels from two weeks ago. The implied probability of a rate hike in June climbed to 62.5% from last week's 49.6%, according to the fed funds futures market.