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Weekly Market Review, March 11, 2019

12 March 2019

Clint McGarvin, CFA® | Portfolio Manager/Research Analyst

U.S.

U.S. equity markets declined all five days last week. Large caps declined a little more than 2.1% and small caps fell slightly more than 4.2%. The week opened with construction spending, which declined 0.6%, exceeding an estimated 0.3%. However, most reports out last week were positive. The Markit Services PMI and the ISM nonmanufacturing index were released Tuesday and both indexes showed an acceleration in the services sector. In fact, the Markit Services PMI showed huge jumps in healthcare and consumer goods[i]. The ISM services index jumped three points with the leading indicators of new orders, new export orders, and backlog of orders all growing[ii]. Wednesday, the ADP Employment report came out showing the U.S. economy added 183,000 jobs with gains across small, medium, and large businesses across most industries[iii]. Nonfarm payrolls released Friday showed growth of only 20,000 jobs. Looking closer, the report shows the unemployment rate declined to 3.8% and the number of people employed increased by 255,000. More importantly for consumer spending, the increase in the number employed over age 25 increased by 337,000[iv].

This week we will get several economic reports that will, when combined with the jobs reports above, give a good snapshot of the health of the economy. January retail sales will be released Monday and we will see if the 1.2% decline in December confirms consumer confidence is weakening or if December was simply an aberration. Other reports out this week include consumer prices, consumer sentiment and expectations, durable goods, and producer prices. Also, out this week are retail earnings, which gives a look into the health of the consumer and the economy. The coming reports will fill the gaps created by the government shutdown in January[v].

International

International developed stocks declined just less than 1.8% on the week while emerging market equities were down about 2.9%. European and emerging economies slowed throughout 2018 and that trend has continued thus far in 2019. On Thursday European Central Bank (ECB) President Mario Draghi announced the first new stimulus program designed to reverse the slowdown with new loans designed to boost lending by European banks. The ECB also cut economic growth forecasts for Europe from 1.7% to 1.1%[vi]. The economic news out of China was also negative with Chinese exports dropping 20.7% in February 2019 from February 2018[vii]. Inflation in China is following the same trend as inflation in the U.S. with the year-over-year increase in inflation falling from 1.7% in January to 1.5% in February[viii]. On the other hand, European inflation increased from 1.4% to 1.5% over the same time span[ix].

Fixed Income

Nonfarm payroll data was a factor in the decline of longer-dated Treasury yields on the week, the yield curve also flattened. In fact, on Friday, the yield curve was inverted from 3-months to 5-years even from 1-month to 5 years, with the 1-month yielding 2.45%, the 3-month at 2.46% and the 5-year at 2.42% at close on Friday. Historically, the 3-month to 10-year segment of the yield curve has been a good predictor of coming recessions. When the 3-month yield exceeds the 10-year yield on a sustained basis, a recession starts in, on average, 18 months following the inversion.

Summary

Economic reports last week were mostly positive. The U.S. services sector accelerated, labor markets continued to grow, with some dispersion between the two reports.  A report not mentioned above was December new home sales, which increased by 3.7% from November, but that was down 2.4% on a year-over-year basis. The solid month-over-month growth was unexpected. Lower rates and solid labor markets suggest the housing market may be able to stage a recovery in the coming months, helping the economy. However, news from international economies indicates slowdowns there are likely more pronounced.


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INDEX
INDEX DESCRIPTION
S&P 500®
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
Russell 2000
Measures the performance of the small-cap segment of the U.S. equity universe
Barclays US Aggregate Bond
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.
Barclays Capital Long U.S. Treasury
Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value

[i] PMI by IHS Markit (2019) HIS Markit US Sector PMI™. Retrieved from https://www.markiteconomics.com/Survey/PressRelease.mvc/76d1ec196d4845cf966dda764b192c89
[ii] Institute for Supply Management (2019), February 2019 Non-Manufacturing ISM® Report on Business®. Retrieved from https://www.instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?navItemNumber=31115
[iii] ADP Research Institute (2019), ADP National Employment Report: Private Sector Employment Increased by 183,000 Jobs in February. Retrieved from https://www.adpemploymentreport.com/2019/February/NER/docs/ADP-NATIONAL-EMPLOYMENT-REPORT-February2019-Final-Press-Release.pdf
[iv] Bureau of Labor Statistics (2019), The Employment Situation – February 2019. Retrieved from https://www.bls.gov/news.release/pdf/empsit.pdf
[v] MarketWatch (2019) Economic Calendar. Retrieved from https://www.marketwatch.com/tools/calendars/economic
[vi] CNBC (2019), Europe Markets Close Down after Weak China, US Data; Sterling Sinks on Brexit Deadlock. Retrieved from https://www.cnbc.com/2019/03/08/european-stocks-investors-digest-ecb-draghi-stimulus.html
[vii] CNBC (2019), Europe Markets Close Down after Weak China, US Data; Sterling Sinks on Brexit Deadlock. Retrieved from https://www.cnbc.com/2019/03/08/european-stocks-investors-digest-ecb-draghi-stimulus.html
[viii] Trading Economics (2019), Calendar March 8, 2019. Retrieved from https://tradingeconomics.com/china/calendar
[ix] Trading Economics (2019), Euro Area Inflation Rate. Retrieved from https://tradingeconomics.com/euro-area/inflation-cpi
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