The Week In Review


The stock market closed the week on a decidedly lower note, falling victim to fears about potential trade wars, the Federal Reserve's tightening bias, and the specter of earnings growth not living up to this year's high expectations.  The Dow, Nasdaq, S&P 500, and Russell 2000 declined between 1.9% and 2.3% in Friday's trade.

Things got off to a bad start following the news that President Trump ordered the Office of the U.S. Trade Representative to consider whether it would be appropriate to impose an additional $100 billion of tariffs on Chinese imports on top of the proposed $50 billion of tariffs announced on Wednesday.

China quickly responded, saying it would do what is necessary to protect its interests at any cost if the U.S. ultimately pressed ahead with such a tariff plan.

What rattled the stock market, though, was the feistier-sounding nature of administration officials today discussing the new proposal, as well as their seeming lack of concern about the difficulties the stock market has been having on account of the heated trade rhetoric between the U.S. and China.

President Trump noted that the stock market might have to have a little pain as he works to protect the trade interests of the U.S.; meanwhile, Treasury Secretary Mnuchin said in a CNBC interview that he is not focused on short-term market swings and that there is potential of a trade war with China even though that is not the objective.

The major indices rolled over after Mr. Mnuchin's comments and then cascaded even lower after Fed Chair Powell said he thinks inflation will pick up this Spring and that he sees further gradual rate hikes.

In essence, the stock market didn't get the verbal support it has been accustomed to receiving from leading officials in periods of uncertainty.  Ironically, that fed a heightened sense of uncertainty about the outlook for the economy and earnings that kept many buyers on the sidelines and Friday's sellers focusing their efforts on the economically-sensitive sectors.

Every sector ended with a loss.  The industrials sector (-2.7%) suffered the largest decline, but it had ample company. 

The information technology (-2.5%), financial (-2.4%), materials (-2.4%), and health care (-2.4%) sectors all underperformed while losses in the consumer discretionary (-2.1%) and energy (-1.8%) sectors also weighed heavily.

The Dow Jones Industrial Average fell as many as 767 points on Friday before paring its losses in late action.  That recovery effort coincided with a bounce in the S&P 500 after it breached its 200-day moving average (2594).  Once again, though, the violation of that key technical level brought out the buyers who succeeded in pushing the S&P 500 back above the 200-day moving average by the closing bell.

The trade issues dominated the market narrative on Friday, but there was more to the story.  The March employment report provided its own twist for the market.

It showed a surprisingly weak 103,000 gain in nonfarm payrolls and a sturdy 0.3% increase in average hourly earnings.  All in all, it was a mixed report, yet it didn't alter the market's thinking about monetary policy other than making it think there was a diminished probability of a fourth rate hike in December.

The CME FedWatch Tool now pegs the probability of a fourth rate hike in December at 24.4% versus 32.7% on Thursday. 

Reviewing Friday's economic data, which was limited to the Employment Situation Report for March and the Consumer Credit Report for February:

  • March nonfarm payrolls increased by 103,000 ( consensus 175,000). March private sector payrolls increased by 102,000 ( consensus 180,000). March unemployment rate was 4.1% ( consensus 4.0%) versus 4.1% in February. March average hourly earnings were up 0.3% ( consensus 0.2%), after increasing 0.1% in February.  Over the last 12 months, average hourly earnings have risen 2.7%, versus 2.6% for the 12 months ending in February.
    • The key takeaway from the report is that it was neither too hot nor too cold to provide a clear basis for the Federal Reserve to re-think its outlook for monetary policy. At the same time, it will temper the market's concerns about the prospect of a fourth rate hike this year in December.
  • Total outstanding consumer credit increased by $10.6 billion in February ( consensus $15.0 billion) after increasing an upwardly revised $15.6 billion (from $13.9 billion) in January.
    • The growth in February was driven almost entirely by nonrevolving credit, which was up $10.5 billion from January to $2836.6 billion.

There is no economic data of note on Monday.

  • Nasdaq Composite: +0.2% YTD
  • Russell 2000: -1.4% YTD
  • S&P 500: -2.6% YTD
  • Dow Jones Industrial Average: -3.8% YTD

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