In our annual economic Investment Outlook, we predicted that interest rates would rise but not enough to derail the expansion. At the same time, we anticipated that the conflicting signals of robust earnings growth and above-average valuation would settle somewhere in the middle.
One of the four takeaways in our 2018 Outlook was, “It’s the Economy,” meaning that over the long term, financial markets tend to do a good job shrugging off headline risk and political drama. Instead, markets focus on the health of the economy. This attribute was once again demonstrated this week with equity markets gaining more than 2 percent despite heightened geopolitical tension as the U.S. formally exited the 2015 Iran nuclear deal.
Charles Dicken’s iconic tome illustrates aptly the interplay between earnings news and economic news of late. Every day it seems good earning news is complemented with slowing economic news and vice versa. Recent market volatility has pushed cautious investors to the sidelines and those that remain are riding the markets up and down with every recent news release.
Stock markets were essentially flat for the week, but individual stocks gyrated with earnings announcements. Economic data continues to be solid, but not spectacular. First quarter U.S. GDP came in at 2.3 percent, marking the fastest first quarter growth since 2015. Interest rates were essentially unchanged for the week as well.
Stocks and bonds moved in opposite directions as the S&P 500 finished positive on the week despite falling nearly 2 percent between Thursday and Friday. Bonds, on the other hand, declined due to higher interest rates.
With this week’s latest rebound, the S&P 500 has now closed up or down more than 1 percent 27 times year-to-date ‒ this is more than three times the daily volatility that investors experienced in 2017. Accompanying higher stock prices, safe-haven bonds retreated modestly.
With trade tensions picking up, the S&P 500 experienced a wild ride this week, ending the week declining more than 1 percent. The first week of trading in the second quarter experienced huge intraday swings, highlighted by Wednesday’s volatility.
The S&P 500 put up strong gains into the holiday and finished up 2 percent for the week. This quarter has been marked by the return of volatility with the market posting daily gains or losses in excess of 1 percent on 22 different occasions. To put this in perspective, there were just eight of these instances in all of 2017.
In the face of unquestionably strong economic data, global equities declined nearly 5 percent on the week with the S&P 500 falling close to 6 percent. The sharp selloff can be attributed to a confluence of factors, none of which will have any impact on near-term earnings momentum.
U.S. factory production exceeded growth expectations and the University of Michigan consumer confidence survey came in at a 14-year high, helping U.S. stocks to break out of their four-day slump (triggered by tariffs and White House turmoil). However, it won’t be enough to turn in positive numbers for the week.
Strong economic data led the market to big gains this week, despite President Trump’s tariff announcement. The S&P 500 was up over 3 percent, while bond yields were quiet on the week. Volatility has indeed returned to the market with three-out-of-five days experiencing more-than-1-percent swings in value.
For the week the equity markets were lower by more than three percent as investors reacted to the news that President Trump intends to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports fueling fear of protectionist economic policy.
Global equity markets were up slightly this week after the U.S. experienced its greatest one-week gain since 2011 in the previous week. Interest rates took a pause in their upward move with the 10-Year Treasury flat on the week at 2.87 percent.
Following the stock market’s first correction since the Chinese growth scare two years ago, blue-chip stocks have rebounded furiously, producing the best week of returns since December of 2011. Investors spooked by the rapid descent of stock prices earlier this month are now scrambling to get back in.