Market Perspective for March 23, 2018

Facebook (FB) derailed the Nasdaq early in the week and it spilled over into broader selling later in the week. The Russell 2000 Index was the strongest index, falling 4.79 percent. The Nasdaq trailed with a loss of 6.95 percent. Facebook declined 14.07 percent.

Oil prices climbed above $65 a barrel this week, up from $62 at the end of last week. A larger-than-expected inventory drawdown boosted prices, as did political events. Saudi Crown Prince Mohammed bin Salman met with President Trump on Tuesday and on Thursday. President Trump also named John Bolton as National Security Adviser. Trump and Bolton both have issues with the Iran nuclear deal, an agreement that allows increased Iranian oil exports.  SPDR Energy (XLE) fell 0.48 percent on the week.

The Federal Reserve raised interest rates a quarter-point as expected this week. The Fed’s policy statement forecast three hikes in 2018.

February existing home sales beat expectations this week, rising to an annualized pace of 5.54 million versus forecasts of 5.40 million. February new home sales slightly missed expectations of 622,000 at 618,000, but this was higher than year-ago levels and consistent with the current expansion.

February durable goods orders rose 3.1 percent versus forecasts of 1.8 percent. Initial claims for unemployment hit 229,000, still near four-decade lows. The flash manufacturing PMI for March was 55.7, up from last month’s 55.3. The services PMI slipped to 54.1 versus 55.9 last month. The final numbers will be released at the start of April.

President Trump announced $50 billion in tariffs on Chinese imports in conjunction with a Section 301 investigation on Thursday. Tariffs will become law in June if there’s no agreement with China. President Trump wants an immediate reduction in the trade deficit of $100 billion, which would likely come via increased Chinese imports. China’s initial response was mild with only $3 billion in retaliatory tariffs. Equities with significant exposure to the Chinese market such as Caterpillar (CAT) fell in response. Chinese stocks also fell, and reports indicate the Chinese government bought Mainland equities on Friday.

The U.S.-China bilateral trade deficit is on pace to exceed $400 billion in 2018, equivalent to 2 percent of the U.S. economy and 3.6 percent of Chinese GDP. If the trade deficit fell by $100 billion and neither country substituted the lost imports and exports, U.S. GDP growth would increase roughly 0.5 percent while China’s could slow by 0.8 percent.

The U.S. Dollar Index fell 0.85 percent this week. SPDR S&P 500 (SPY) underperformed iShares MSCI EAFE (EFA) and iShares MSCI Emerging Markets (EEM) due to the weaker dollar and Facebook’s effect on technology shares.

Although the Federal Reserve hiked short-term interest rates this week, long-term rates declined. The 10-year Treasury yield fell as low as 2.80 percent on Thursday.

Earnings news was strong this week with FedEx (FDX) reporting $3.72 per share in earnings versus estimates of $3.08 and revenue of $16.5 billion. Tax cuts and improved efficiency have also lifted 2018 guidance. Nike (NKE) beat earnings and expects its North American sales slump to turn around in early 2019. Overseas growth drove earnings this year.

Micron Technology (MU) also beat earnings and raised guidance this week, but shares slumped with the broader market. General Mills (GIS) reported $0.71 per share in earnings this week, missing expectations by a nickel.


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