The Week In Review



Wall Street wrapped up a disappointing week on a positive note on Friday, in what was a quiet and fairly range-bound session. The S&P 500 advanced 0.2%, breaking a four-session losing streak, while the Dow and the small-cap Russell 2000 added 0.3% and 0.6%, respectively. The tech-heavy Nasdaq underperformed, closing a tick higher.

Gains were modest, but broad, with nine of eleven S&P sectors closing in the green. The energy group (+1.0%) was the top performer, benefiting from a jump in the price of crude oil; WTI crude futures rallied 2.0% to $62.35 per barrel. Conversely, the top-weighted technology sector (-0.1%) finished at the bottom of the leaderboard.

The technology group struggled for much of the session, keeping the broader market's gain in check, with Broadcom (AVGO 254.87, -12.89) showing particular weakness; the chipmaker dropped 4.8% even though it beat quarterly profit estimates. Tech-giant Alphabet (GOOGL 1134.42, -16.19) also struggled, losing 1.4%, but Adobe Systems (ADBE 225.55, +6.68) bucked the trend, rallying 3.1% after beating both earnings and revenue estimates for its fiscal first quarter.

Overseas, equity indices in the Asia-Pacific region ended Friday broadly lower, with Japan's Nikkei losing 0.6%, while the major bourses in Europe finished with gains of around 0.3% apiece. The U.S. dollar climbed 0.2% against the euro to 1.2287, but dropped 0.2% against the yen to 106.08.

In the bond market, U.S. Treasuries closed the week on a lower note, sending yields higher across the curve. The benchmark 10-yr yield climbed two basis points to 2.84%, while the 2-yr yield ticked up one basis point to 2.29%, which is its highest level since September 2008.

The relative weakness in the 10-yr note steepened the yield curve a bit, pushing the 10-2 spread to 55 basis points. This steepening helped underpin the financial sector (+0.2%) on Friday, but a decline in shares of Wells Fargo (WFC 55.90, -0.93) weighed on the group, leaving it roughly in line with the broader market. WFC shares lost 1.6% following a Wall Street Journal report that a federal investigation into the bank's sales practices now includes its wealth-management unit.

Investors received several pieces of economic data on Friday, including February Housing Starts and Building Permits, February Industrial Production and Capacity Utilization, the preliminary reading of the University of Michigan Consumer Sentiment Index for March, and the Job Openings and Labor Turnover Survey for January:

  • Housing starts decreased to a seasonally adjusted annualized rate of 1.236 million units in February ( consensus 1.283 million), down from a revised 1.329 million units in January (from 1.326 million). Building permits decreased to a seasonally adjusted 1.298 million in February ( consensus 1.330 million) from a revised 1.377 million in January (from 1.396 million).
    • Starts and permits were weaker than expected, yet the key takeaway is that there was some underlying detail in the report that helped offset the headline misses, namely the increase in single-family starts and the uptick in the number of units under construction.
  • Industrial Production increased 1.1% in February ( consensus +0.3%), while the January reading was revised to -0.3% (from -0.1%). Meanwhile, Capacity Utilization ticked up to 78.1% ( consensus 77.7%) from a revised reading of 77.4% in January (from 77.5%).
    • The key takeaway from the report is twofold: (1) manufacturing output was a core driver of the increase in industrial production and (2) capacity utilization hit its highest rate since January 2015, which will keep inflation expectations alive in the market narrative.
  • The preliminary reading of the University of Michigan Consumer Sentiment Index for March rose to 102.0 ( consensus 99.5) from 99.7 in February.
    • The key takeaway from the report is that the gain in the Sentiment Index was driven entirely by households with incomes in the bottom third. Another notable takeaway is that near-term inflation expectations increased to their highest level in several years.
  • The January Job Openings and Labor Turnover Survey showed that job openings increased to 6.312 million from a revised 5.667 million (from 5.811 million) in December.

On Monday, investors will not receive any economic data.

  • Nasdaq Composite: +8.4% YTD
  • S&P 500: +2.9% YTD
  • Dow Jones Industrial Average: +0.9% YTD
  • Russell 2000: +3.3% YTD

Week In Review: Three Steps Forward, Two Steps Back

Equities reversed course this week, undoing about a third of last week's rally, as investors continued to search for equilibrium following the abrupt sell off in early February. Since that drop, the S&P 500 has had three up weeks and two down weeks, reclaiming around 60% of its nearly 300-point plunge. The S&P 500 lost 1.2% this week, while the Nasdaq Composite and the Dow Jones Industrial Average declined 1.0% and 1.5%, respectively.

Trade war talk continued this week following reports that President Trump is seeking to hit China with steep tariffs and investment restrictions as early as next week. Those tariffs, which are expected to total as much as $60 billion, would initially be targeted towards information technology, telecommunications, and consumer electronic products as punishment for alleged intellectual property theft, but could eventually expand to a broader range of products.

The proposed tariffs were cited as the primary driver of this week's sell off, as many believe they could lead to a tit-for-tat trade war between the world's two largest economies. Peter Navarro, Director of the White House National Trade Council, attempted to ease the tariff-induced fears in a CNBC interview on Thursday, assuring viewers that the U.S. can implement tariffs "in a way that is peaceful and will improve and strengthen the trading system."

In other political developments, the White House made some notable personnel changes this week--CIA Director Mike Pompeo replaced Rex Tillerson as Secretary of State, and longtime CNBC personality Larry Kudlow replaced Gary Cohn, who resigned last week, as the president's top economic advisor--and the New York Times reported on Thursday that Special Counsel Robert Mueller has subpoenaed the Trump Organization for documents, some of which relate to Russia.

Nine of eleven S&P sectors finished the week in negative territory, with materials (-3.2%) being the weakest performer. Materials giant Monsanto (MON) dropped 4.8% on Thursday following news that its pending merger with Bayer will likely face additional hurdles from antitrust officials.

Meanwhile, the consumer staples (-2.1%), industrials (-2.0%), and financials (-2.4%) sectors also showed particular weakness. Financials suffered amid a flattening of the yield curve, which doesn't bode well for lenders, as they rely on the difference between what they spend on deposits and what they charge for loans. The yield on the 2-yr note climbed three basis points to 2.29%, while the benchmark 10-yr yield dropped six basis points to 2.84%, cutting the 10-2 spread to 55 bps--its lowest level since late January.

On a positive note, the rate-sensitive utilities (+2.6%) and real estate (+1.3%) sectors finished the week in the green.

Investors received several influential economic reports this week, including the February readings for the Consumer Price Index, the Producer Price Index, Retail Sales, Housing Starts, and Building Permits. In short, the data didn't really give investors a reason to adjust their rate-hike expectations; it's all but certain that the Fed will hike rates at its meeting next week, and the Fed funds futures market is still pointing towards a total of three rate hikes this year--although the chances for a fourth hike are sitting at 34.3%.

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