The Week In Review


The S&P 500 increased 0.7% on Friday, led by shares of energy and health care companies; meanwhile investors remained optimistic about a U.S.-China trade deal. Friday's gains lifted the benchmark index into positive territory for the week, advancing 0.4%.

The Nasdaq Composite (+0.8%) extended its weekly gain to 0.9%. The Dow Jones Industrial Average (+0.4%) and the Russell 2000 (+0.9%) finished flat for the week.

The S&P 500 energy (+1.8%), health care (+1.4%), and consumer discretionary (+0.9%) sectors outperformed. Conversely, the consumer staples (-0.2%), materials (-0.2%), and real estate (-0.1%) sectors were the lone groups to finish with losses.

Stocks jumped out of the gate, propelled by a Bloomberg report that the U.S. and China are working on a document that lays out the provisions of a trade deal and that such a document could be ready to be signed by Presidents Trump and Xi as early as mid-March. Some new inflows on the first trading day of the month likely also contributed to the positive bias.

The major averages, however, lost steam and fell to session lows following the release of the ISM Manufacturing and Consumer Sentiment reports for February. The reports weren't "bad," but both came in below expectations and provided an excuse to sell an overbought market.

Selling was short-lived, though, as has been the case all year. The S&P 500 sectors staged a steady rebound during the afternoon, allowing the benchmark index to close near session highs and above the 2800 level.

Positive earnings reports from retailers Gap (GPS 29.51, +4.11, +16.2%) and Foot Locker (FL 63.07, +3.55, +6.0%) helped spur gains in the consumer discretionary sector (+0.9%). GAP also announced it will spin off Old Navy as a separate company. 

Conversely, Walgreens Boots Alliance (WBA 66.61, -4.58, -6.4%) underperformed after Robert W. Baird cut its price target to $67 from $70. Baird maintained a 'neutral' rating on the stock.

Tesla (TSLA 294.79, -25.09) was a story stock, losing 7.8%, after CEO Elon Musk conceded that the company will not be profitable during the first quarter. The Tesla team also said it will shift sales worldwide to online only. The transition will reduce costs in order to lower the prices of its vehicles, including the Model 3. 

U.S. Treasuries closed out the week on a lower note, sending yields higher across the curve. The 2-yr yield increased five basis points to 2.55%, and the 10-yr yield increased four basis points to 2.76%. The U.S. Dollar Index increased 0.3% to 96.46. WTI crude lost 2.5% to $55.81/bbl.

Reviewing Friday's economic data:

  • Personal income increased 1.0% in December ( consensus +0.3%) and declined 0.1% in January ( consensus +0.3%). Personal spending declined 0.5% in December ( consensus -0.2%). The personal savings rate in December surged to 7.6% from 6.1% in November. 
    • The PCE Price Index for December was up 0.1% while the core PCE Price Index, which excludes food and energy, increased 0.2% ( consensus +0.1%). That left the those indexes up 1.7% and 1.9%, respectively, year-over-year and below the Fed's longer-run inflation target.
    • The key takeaway from the report is that there is a fair amount of signaling noise that will likely prompt the market to dismiss it and encourage the Fed to stick by a wait-and-see mindset, buying more time for the stock market to exist without fear of a Fed rate hike.
  • The ISM Manufacturing Index weakened to 54.2 in February ( consensus 56.0) from 56.6 in January.
    • The dividing line between expansion and contraction is 50.0, so the key takeaway from the February number is that it should be interpreted as a slowdown, and not a decline, in the pace of manufacturing expansion.
    • According to the ISM, the relationship between the index and the overall economy indicates the February reading corresponds to a 3.3% increase in real GDP on an annualized basis.
  • The final reading for the University of Michigan's Index of Consumer Sentiment for February was 93.8 ( consensus 95.6). That was down from the preliminary reading of 95.5, but up from the final reading of 91.2 for January.
    • The key takeaway from the report is that it conveyed the finding that no improvement in real income expectations was observed among households in the bottom two-thirds of the income distribution. That perspective, should it persist, or ultimately come to fruition, would be a drag on consumer spending activity.

Looking ahead, investors will receive Construction Spending for December and auto and truck sales on Monday.

  • Russell 2000 +17.9% YTD
  • Nasdaq Composite +14.5% YTD
  • S&P 500 +11.8% YTD
  • Dow Jones Industrial Average +11.6% YTD

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