Eq: Total Market
Headline fourth quarter growth got downgraded this week to just 2.2% (from 2.6%). That may not seem like a devastating fall, but if you take a closer look at the figures, they are worse than at first glance. In particular, it becomes clear that growth was actually weakening all throughout 2018 (versus 2017). While the fourth quarter especially showed weakness, it was really only two one-time quirks that kept growth as high as it was for the year: increased military spending and higher spending by non-profits. Neither of those factors are very tied to the underlying economy and consumers.
FINSUM: This is pretty eye-opening and does sap our confidence a bit. Consumer spending also barely rose in January, which is another negative sign.
Another day, another round of bad news on the economy. In what comes as another round of disappointing data, GDP for the fourth quarter was just revised downward from 2.6% to 2.2%, showing the economy finished the year on a softer note than expected. The data adds to the list of poor numbers—labor, housing etc—that have been hitting investors.
FINSUM: Weak economic and housing data have been flowing like a hose lately, and today is no different. This will only add to the downward momentum in yields.
The Daily FINSUMMARY- sponsored by ETF Action
Sell-off. U.S. equity markets tumbled on global growth concerns and weak manufacturing data out of the U.S. and the Eurozone. For the first time since 2007, the 3-month treasury yield eclipsed the 10-year, officially inverting the yield curve which has historically been an indication of an ensuing recession. However, a great piece by Bianco Research points out that previous recessions were preceded by inversion for 10 straight days whereas this is just day one. Furthermore, recession isn't immediate following inversion. All major averages dropped with the S&P 500 (SPY -1.93%), the Dow (DIA -1.78%), and the Nasdaq 100 (QQQ -2.20%) falling nearly 2%.
Macroeconomic data was mostly negative on Friday. U.S. PMI came in weak and dropped to a six-month low, highlighted by manufacturing PMI hitting a 21 month low. To follow this up, indications of an unwanted inventory build is showing as wholesale inventories grew by a much larger margin M/M than expected. The inventories to sales ratio rose to 1.34 which last peaked in early 2016 at 1.38. However it wasn't all bad as February existing-home sales saw its largest M/M gain in over three years, surging 11.8% on lower mortgage rates, higher consumer confidence, more inventory, and rising incomes.
Earnings & Movers: Nike down (NKE -6.61%) after missing revenue estimates yesterday while Tiffany rose (TIF 3.15%) after beating on earnings but missing on sales due to declining Chinese tourism during Q4. For the week, nine S&P 500 companies reported earnings (1.32% of S&P 500 market-cap), eight of which beat earnings estimates, primarily came from the Consumer Discretionary sector (table below).
Large-caps (IVV -1.89%) outperformed small-caps (IJR -3.65%) in the risk-off atmosphere while defensive sectors offered some protection. Utilities (XLU 0.72%) led along with Consumer Staples (XLP -0.13%) while Financials (XLF -2.76%), Energy (XLE -2.71%), and Materials (XLB -2.98%) lagged. We have talked a lot about falling yields and banks this week, but it got got much worse on Friday for Banks (KBE -4.24%) as treasury yields plummeted. The industry finished down nearly 10% on the week.
Developed ex-U.S. (EFA -1.92%) beat out Emerging markets (EEM -2.93%) but it was a sea of red across the globe. German (EWG -2.76%) manufacturing PMI was just plain bad. New orders slumped as the index dropped further into contraction territory which marks the third consecutive month of contraction and the lowest level since 2012. On a positive note (kind of), the EU granted a Brexit extension to May 22 if PM Theresa May can get the U.K. parliament on board with her plan. If not, a hard-Brexit is set for April 12.
Treasury yields fell drastically with the 10-year settling at 2.45%. The Ag (AGG 0.50%) benefited from the drop in yields while long duration (TLT 1.55%) outperformed short (SHY 0.17%). Investment Grade (LQD 0.61%) easily bested High Yield (HYG -0.36%).
Lower crude oil prices (USO -1.69%) weighed on broad commodities (DJP -0.87%) and the Dollar advanced modestly (UUP 0.19%). Gold (GLD 0.23%) benefited from the fall in equities while copper (CPER -2.06%) fell.
The Daily FINSUMMARY- Sponsored by ETF Action
US markets hit five-month highs as major averages climbed steadily up and to the right throughout the day. A day after the Fed announced a very dovish position, tech shares (Apple) and positive earnings led domestic equities higher. At the close, the S&P 500 (SPY 1.13%), the Dow (DIA 0.89%), and the Nasdaq 100 (QQQ 1.56%) all gained.
Jobless claims were down W/W (and below consensus estimates) and the Philadelphia manufacturing survey had mixed results. Current conditions rebounded from last month, buoyed by increases in new orders and shipments. However, future expectations fell to a three-year low. Meanwhile, the Conference Board Leading Indicators Index rose for the first time in five months, primarily due to a bounce in equity markets and accommodative financial conditions.
Earnings & Movers: Micron Technology (MU 9.62%) was up big after beating estimates after yesterday's close while Apple surged (AAPL 3.68%) and hit a four month high on several analyst upgrades. Darden (DRI 6.87%) was up on an earnings beat before the bell and Nike fell after hours on a revenue miss. It was a bad day for Biogen (BIIB -29.23%) after its Alzheimer's drug was discontinued due to ineffectiveness.
Small-caps (IJR 1.31%) edged out large-caps (IVV 1.12%) but mid-caps (IJH 1.35%) led all sizes (and still do YTD). With 10 of 11 sectors gaining, tech (XLK 2.51%) provided leadership on the shoulders of Apple while Financials (XLF -0.31%) lagged again, pushed down by banks (KBE -1.03%).
Emerging markets (EEM 0.14%) narrowly outperformed developed ex-U.S. (EFA -0.06%) as global regions were mixed. Latin America (ILF -1.70%) was dragged lower by clouding uncertainty surrounding Brazil's (EWZ -2.30%) pension reform after former Brazilian President Temer was arrested on corruption charges. The U.K. (EWU -0.18%) fell along with Developed Europe (IEV -0.27%) as EU officials deliberate over possible extension deadlines for Brexit.
Treasury yields remained largely unchanged with the 10-year settling at 2.54%. Muted movement in yields had the Ag (AGG 0.02%) mostly flat while Investment Grade (LQD 0.19%) bested High Yield (HYG -0.02%). While the 10-2 year spread remains at ~13 basis points, the spread between the 10-year and the 3-month T-bill dipped below 10 basis points for the first time since 2007.
Bonds and stocks are sending different signals right now, and it is hard to tell which side is correct. Bonds are reflecting an increasingly bearish outlook on the economy, with yields falling. Stocks, on the other hand, have been jubilant so far this year. The reality is that both sides cannot be correct. Historically speaking, bonds have usually been more astute is measuring the direction of the economy and markets, and if that is the case, then we would be headed for a downturn.
FINSUM: The Fed really weighed in with its view yesterday and they are clearly worried about the direction of the economy. Are bond investors right again?
Bloomberg has put out a very bearish article on the economy. The publication is arguing that there is a 2/3 chance of a recession beginning this year, and that a bear market is likely to happen alongside it. As evidence of the pending downturn, the article cites these as indicators: the nearly inverted yield curve, the big fall in stocks in Q4, weak housing activity, terrible February payrolls, and the fact that the rest of the world is slowing. One of the most acute worries though is that the Fed will keep hiking as part of an effort to leave itself room to cut rates in the next recession, an action which could drive the economy into a recession.
FINSUM: Again, much of the direction of assets and the economy depends on the Fed’s mindset. If the central bank returns to hiking, a recession looks like a sure thing. But if not, it is far from certain.