Financial Review

1Q Wrap

…March and first quarter wrap up. Consumer sentiment still high, spending moderates. Emoluments. Trump v. Amazon. Windows to clouds.

Financial Review by Sinclair Noe for 03-29-2018

DOW + 254 = 24,103
SPX + 35 = 2640
NAS + 114 = 7063
RUT + 16 = 1529
10 Y – .03 = 2.74%
OIL + .52 = 64.90
GOLD + .60 = 1326.00


Major U.S. markets will be closed for Good Friday. The Easter weekend, including Easter Monday on April 2, also coincides with Passover this year, which begins on Friday. most European exchanges will also remain shut for Easter Monday.


So, we can wrap up the week, the month of March, and the first quarter. For the week, the Dow rose 2.6%, while the S&P added 2.1% and the Nasdaq was up 1%. For the month of March, all three saw steep declines, with the Dow off 3.5%, the S&P 500 off 2.7% and the Nasdaq off 2.9% in its biggest monthly drop since January 2016. In the first quarter, during which time the Dow and S&P fell into correction territory, the Dow fell 2.3% and the S&P lost 1.2%. Both ended nine-quarter streaks of gains; for the Dow, that represented its longest such streak since 1997. The Nasdaq gained 2.3% in the first quarter, its seventh-straight quarterly gain. The first quarter also saw the return of volatility. Just in the first three months of this year, the S&P has jumped or fallen 1 percent on 23 trading days, three times the number of 1-percent moves it made in all of 2017. In 2016, there were 48 such days.


Facebook rose 4.4 percent today, while Apple, Netflix and Alphabet also closed higher. Microsoft rose 2.1 percent after the company announced a major reorganization. However, the S&P 500 technology sector ended the month 4 percent lower following a slew of negative news for some of the key companies in the space. Last week, reports emerged alleging that Cambridge Analytica, an analytics company, had gathered data from 50 million Facebook profiles without users’ permission.


The MSCI All-Country World Index fell 1.5 percent for the quarter. Politics, the rising potential for trade wars, central bankers talking about pulling back from accommodative policies and some soft economic data all have stock investors re-evaluating their lofty expectations coming into the year. The MSCI Emerging Markets Index was up about 1 percent this quarter.


The recent downturn for stocks may bring out the value investors. The S&P 500 is trading at about 16.5 times forward earnings, well below the 18.9 level it was at in mid-December. Valuations as measured by price-to-earnings ratios are now the lowest since late 2016. And when you add the S&P 500’s 1.9 percent dividend yield to its 2 percent buyback yield investors get a distribution level of almost 4 percent. That’s a historically high level when compared with a yield of about 2.75 percent on the 10-year Treasury note.


And with all the turmoil in the markets, we saw a safe haven move to Treasuries, with the yield on the 10-year note dropping 13 basis points in March, even as the Federal Reserve raised its target for interest rates. That means the bond bears missed again in March. Most government bonds have benefited from the declines in worldwide stock indexes as investors seek shelter in safe assets, but that did not carry over to corporate debt, which lost value in sympathy with equities.


As we move into April, we also move into earnings reporting season. Analysts now expect first-quarter earnings for S&P 500 companies to rise 18.5 percent from a year ago. The first-quarter S&P profit forecast is up 6.3 percentage points since Jan. 1, while the forecast for all of 2018 is up 7.7 points since then, based on Thomson Reuters data.


The University of Michigan’s consumer sentiment report showed consumer attitudes about the economy inched down to a reading of 101.4 at the end of March, but that is still the highest reading since 2004. The index dipped slightly lower at the end of March due to uncertainty about the impact of the proposed trade tariffs, according to the report. Concerns over trade policies offset positive reactions to recent tax reform legislation. Consumers also anticipate interest rates increasing in the foreseeable future, slowing future economic growth.


The updated report on consumer sentiment was reflected in consumer spending. The Commerce Department said that consumer spending increased 0.2 percent last month after a similar gain in January. Spending on long-lasting goods, such as motor vehicles, rebounded 0.2 percent after tumbling 1.5 percent in January. Outlays on services rose 0.3 percent, matching January’s increase. There was also a moderation in monthly inflation readings after prices pushed higher in January. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2 percent last month after advancing 0.3 percent in January. That lifted the year-on-year increase in the so-called core PCE price index to 1.6 percent, the biggest gain since February 2017, from 1.5 percent in January. The core PCE index is the Federal Reserve’s preferred inflation measure. It has been below the U.S. central bank’s 2 percent target since mid-2012. The steady rise in inflation last month also helped curb consumer spending. When adjusted for inflation, consumer spending was unchanged in February after falling 0.2 percent in the prior month. That suggests a sharp slowdown in consumer spending in the first quarter after it surged to a 4.0 percent annualized rate in the fourth quarter. In February, personal income rose 0.4 percent and has now increased by the same margin for three straight months. Wages increased 0.5 percent last month after climbing 0.6 percent in January.


The Atlanta Fed is currently forecasting GDP growth rising at a rate of 1.8 percent in the January-March period. The economy grew at a 2.9 percent pace in the fourth quarter.


A federal judge refused to dismiss a lawsuit alleging Trump is violating the Constitution because his businesses are benefiting from his presidency, the first ruling to find that a litigant can sue the president on the issue.


The ruling found the state of Maryland and the District of Columbia had standing to bring claims against Trump, who hasn’t divested his business holdings. The plaintiffs allege Trump is violating constitutional clauses that prohibit the president from receiving emoluments — things of value — from foreign or state governments. This ruling resolved only one preliminary issue and there will be other arguments in the case. The judge in the future may have to decide what constitutes an emolument and how the constitutional provisions apply to the president.


Trump fired off more criticism at this morning, tweeting that Amazon pays little or no taxes to state & local governments, and that it is the cause of losses at the US Postal System and puts thousands of retailers out of business. Not exactly. Amazon collects sales tax in every state that charges one and remits it to the states — and that’s virtually every state. Amazon also pays local property taxes on its distribution centers as well as on the Whole Foods stores it purchased last year. Amazon does not always collect city and local sales taxes, and it also does not collect sales taxes on purchases made on Amazon from third-party vendors. Because Amazon ships so many packages though the post office, it pays a lower rate than most customers. But Amazon doesn’t get a special rate — it pays the rate that the post office charges other bulk shippers. The Postal Service says it’s business with Amazon is mutually beneficial. The Postal Service is losing money. But it’s not Amazon’s fault. The Postal Service’s biggest money problem is that it pay billions in retirement obligations to its workers 75 years into the future. As far as Amazon’s impact on smaller retailers – well, that has been brutal, but that is also the case with Walmart. On the flip side, Amazon allows small businesses to sell their products to a mass audience when they otherwise wouldn’t be able to achieve global scale. Amazon dropped more than 4% on the open but finished the session up 1.1%.


Microsoft is reorganizing. The shakeup includes the formation of two new engineering teams that will prioritize Microsoft’s cloud and artificial intelligence products. Less emphasis on Windows, more on the cloud. That’s where the growth is. Azure is second to only Amazon Web Services in the public cloud market. While Amazon had 34 percent of the cloud infrastructure services market in the fourth quarter, Azure had 13 percent.


Spotify was valued at about $8.5 billion the last time it raised money from private investors. Now it’s about to go public, and it might be worth more than $40 billion. That would make Spotify worth more than Ford, Delta Air Lines, Target, Dow component Travelers  and 370 other companies in the S&P 500. Spotify hasn’t set a price for the stock yet – that usually happens the night before the IPO. Spotify is expected to start trading on April 3.

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