Stocks Fall Slightly in Choppy Week; Bonds Mixed

Good morning,

The Dow (-0.2%), NASDAQ (-0.3%), and S&P 500 (-0.5%) started the week down, but rallied later in the week to trim their losses.  Meanwhile, taxable bonds fell 0.2% and tax-free municipal bonds gained 0.1%.  The 10-year Treasury yield rose 0.07% to finish the week at 4.38%.

Corporate earnings reports for the first quarter have been coming in better than expected in the US.  According to Manulife (formerly John Hancock) Investments, 90% of the S&P 500 companies have reported earnings so far, with 78% exceeding expectations and tracking a 13.8% growth rate over last year.  As for international stocks, 60% have reported their earnings with a smaller 54% exceeding expectations and are tracking a -8.4% growth rate.  Even though US earnings are significantly outpacing their foreign counterparts, international stocks are up 10% YTD while US stocks are down 3% - 7% YTD.  The US has lagged because of less favorable political developments, mainly due to the uncertainty regarding tariffs.  Interestingly, investors have recently shown an appetite for riskier assets, as evidenced by the recent rallies in Bitcoin and growth stocks.

In macro-economic news, the Institute of Supply Managers (ISM) Services sector rose and is considered in expansion territory, with the forward-looking new orders component rising, too.  Conversely, the prices paid component showed the 6th consecutive month of rising prices.  That provides inflationary pressure to the US economy, which puts the Fed in a position that it may hold off on cutting interest rates.  Rate cuts are considered a catalyst for economic growth, but economic growth may also be considered inflationary as well, making the Fed’s job of walking the tight rope even more difficult.

As for the 800-pound gorilla in the room, President Trump announced late last week that a trade deal has been worked out with the United Kingdon, resulting in lower tariffs and other factors considered favorable to the US.  In addition, Trump announced this morning that there would be a 90-day suspension of the lofty tariffs with China to allow time to work on a long-term trade deal to avert a trade war between the two biggest economies in the world.  That news has pushed markets up 2% – 4% in pre-market trading.  As we’ve been saying for a couple months, the markets are reacting more to the rumors on tariffs than economic news.  I look forward to these headlines settling down so we can begin to focus on real economic data again.  Until then, we can expect a rocky ride.  For those who were patient during the sharp decline that started in late February, they have been rewarded with a roughly 15% rise in the markets since April 8.

Have a great day and terrific week!

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