MONTHLY ECONOMIC UPDATE
THE MONTH IN BRIEF
In March, stocks faced another significant challenge. The Trump administration’s sudden plan to institute tariffs on imports sent a shudder through the bulls. All three major Wall Street benchmarks fell more than 2.5% during the month as investors around the world considered the prospect of trade wars involving American, Chinese, and European products. The Federal Reserve raised the target range for the federal funds rate by another quarter point; mortgage rates were little changed for the month, and existing home sales improved. In Europe, leaders agreed on how the Brexit would unfold. The value of bitcoin declined, while gasoline and oil futures rallied. All in all, it was an eventful and volatile month for the economy and the markets.1
DOMESTIC ECONOMIC HEALTH
As March began, President Trump announced that the U.S. would soon impose tariffs of 25% on imported steel and 10% on imported aluminum. Those excise taxes were authorized before the month ended; some nations (including Canada and Mexico) received short-term exemptions from them. Another set of tariffs, about $60 billion annually, were envisioned for various Chinese imports. This last action prompted a direct reaction in China (see “Global Economic Health” below).2,3
The nation’s central bank lifted the benchmark interest rate slightly. Making its sixth, quarter-point hike in less than a year and a half, the Federal Reserve increased the target range on the federal funds rate to 1.50-1.75%. The dot-plot representing the consensus forecast of Fed policymakers still showed a total of three rate hikes for 2018. (Three hikes are also projected for 2019.)4
While investors fretted over possible economic backlash from tariffs, fundamental economic indicators largely delivered good news. Non-farm payrolls swelled with 313,000 net new hires in February, according to the Department of Labor; the headline unemployment and U-6 unemployment rates were respectively unchanged at 4.1% and 8.2%.5
Manufacturing output improved 1.2% in February, while industrial output was up 1.1% (and 4.4% year-over-year). The Institute for Supply Management’s manufacturing purchasing manager index climbed to 60.8 in February, rising 1.7 points. ISM’s service sector PMI declined 0.4 points in February to a still-impressive 59.5.5,6
Household spending increased by 0.2% in February according to the Department of Commerce, with household incomes up 0.4%. The two most-respected consumer confidence indices were still at lofty heights. The University of Michigan’s gauge went from 99.7 at the end of February to a preliminary March mark of 102.0, then a final March reading of 101.4; the Conference Board’s barometer declined to 127.7 from 130.0.5
As for inflation pressure, it moderated slightly: the annualized rise of the Consumer Price Index ticked up to 2.2% in February, with the annualized core CPI gain remaining at 1.8%. Producer prices, though, were up 2.8% year-over-year through February.5
GLOBAL ECONOMIC HEALTH
China followed America’s declaration of tariffs on Chinese imports with a plan to levy excise taxes on U.S. products arriving at its borders. It threatened to tax as many as 120 different products (including wine and fruit) with a 15% tariff, unless both nations settled their trade differences “within a stipulated time.” China also suggested that a 25% excise tax could apply to another set of U.S. imports, including aluminum and pork. While Secretary of Commerce Wilbur Ross said in late March that the U.S. was willing to resume negotiations over the Trans-Atlantic Trade and Investment Partnership, leaders of European Union nations were concerned about what would happen after May 1, when the short-term E.U. exemption from steel and aluminum tariffs would run out. E.U. leaders have requested a permanent exemption from the U.S. metals tariffs and threatened excise taxes on U.S. imports if that does not happen.7,8
The United Kingdom’s path to leaving the E.U. became a bit clearer in March, thanks to new terms agreed to between E.U. and U.K. diplomats. After leaving the E.U. in March 2019, the U.K. will keep all E.U. rules in effect through the end of 2020, while forfeiting its ability to have any say in E.U. decisions. Ireland remains a question mark; an agreement signed in 1988 lets goods and people move through Ireland freely, without a formal border crossing; instituting a formal border could impede trade and travel to and from that republic.9
A few consequential foreign benchmarks rose last month, but not by much. There were gains of 0.39% for Malaysia’s KLSE Composite, 0.43% for Taiwan’s TSE 50, and 0.76% for South Korea’s Kospi. Brazil’s Bovespa was flat (up 0.01%).10
There were many retreats. The MSCI World index lost 2.48%; the MSCI Emerging Markets index, 2.17%. Both Indian benchmarks slipped: the Nifty 50 slumped 3.61%; the BSE Sensex, 3.56%. The Shanghai Composite lost 2.77%; the Hang Seng, 2.44%; the Nikkei 225, 2.78%. Australia’s All Ordinaries tumbled 4.06%. Argentina’s Merval dove 5.74%; Mexico’s Bolsa retreated 2.77%. The major western European indices all lost 2% or more last month: the FTSE 100 sank 2.42%; the DAX, 2.73%; the FTSE Eurofirst 300, 2.35%; the CAC 40, 2.88%; the IBEX 35, 2.44%. Russia’s Micex only fell 1.12%. In Canada, the TSX Composite lost 0.49%.10,11
Energy futures advanced significantly in March. Out in front, unleaded gasoline jumped 16.71%; heating oil gained 6.82%; WTI crude, 5.51%; natural gas, 2.40%. Oil’s rise left the NYMEX price at $64.94 at the close on March 29. Another big March jump occurred for a crop: cocoa surged 15.84%. While corn added 3.68% last month, a few other notable ag futures posted declines big and small: soybeans retreated 0.05%; cotton, 1.77%; coffee, 1.91%; wheat, 6.58%; sugar, 8.38%.12
Bitcoin had a down month. It settled at $7,903.94 on March 29, 25.92% lower than its February 28 close of $10,669.70. The U.S. Dollar Index also took a March loss, albeit one of only 0.51%; it settled at 90.15 on March 29.13,14
Three of the four key metals lost ground in March as well. Copper descended 2.69%; silver, 0.35%; platinum, 6.01%. Gold rose 0.36%. On the COMEX, gold finished March at $1,327.30; silver, at $16.27.12
Existing home sales picked up 3.0% in February, according to the National Association of Realtors. That gain occurred even with just 3.4 months of inventory available; the typical home sold in February stayed on the market for just 37 days. NAR’s pending sales index rose 3.1% in February, a very good signal for March. New home buying weakened 0.6% in February, the Census Bureau noted; that marked a third consecutive monthly decline.15
A major dip for apartment construction sent total housing starts down 7.0% in February; the Census Bureau also reported a 5.7 % fall for building permits. As for home prices, the lagging S&P CoreLogic Case-Shiller Composite Home Price Index (most recent edition: January) still shows them up 6.4% year-over-year.5,15
Mortgage rates were almost unchanged last month. The average interest rate for the 30-year, fixed-rate loan was at 4.44% in Freddie Mac’s March 29 Primary Mortgage Market Survey, just 0.01% higher than on March 1. While the average interest on the 5/1-year ARM rose 0.04% in that period to 3.66%, the average interest rate for the 15-year FRM was 3.90% in both survey editions.16
LOOKING BACK…LOOKING FORWARDVolatility spiked in late March, yet the CBOE VIX really did not rise much for the month: 0.60%. The Russell 2000 advanced 1.12% for March. The big three suffered big losses: the Nasdaq Composite fell 2.88%; the Dow Jones Industrial Average, 3.70%; the S&P 500, 2.69%. The settlements on March 29: DJIA, 24,103.11; S&P, 2,640.87; COMP, 7,063.45; RUT, 1,529.43; VIX, 19.97.1,17
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
Investors weary from two rough months for equities have something to look forward to in April: a new earnings season begins in the middle of this month. In recent years, April has been a very good month for the market; the S&P 500 has advanced in nine of the past ten Aprils, in fact. The index has averaged a 1.5% gain in April since 1950. What will happen in April 2018 is anybody’s guess, but bulls may be reassured by such Wall Street history. In addition, a forecast from FactSet is worth noting: the stock market analytics company projects that S&P 500 firms will report an 18% increase in earnings for fiscal 2018. If that happens, it would be the strongest annual earnings growth in eight years. It is hard to imagine the stiff headwinds now on Wall Street abruptly easing up, but perhaps stocks will take a turn for the better as the second quarter proceeds.21
UPCOMING ECONOMIC RELEASES: In addition to earnings calls, investors will pay attention to these news items in April: the March ISM non-manufacturing PMI, February factory orders, and ADP’s March employment change report (4/4), a new Challenger job-cut report (4/5), the Department of Labor’s latest employment report (4/6), the March Producer Price Index (4/10), the March Consumer Price Index and minutes from the last Federal Reserve policy meeting (4/11), the University of Michigan’s preliminary April consumer sentiment index (4/13), March retail sales (4/16), March industrial output and construction activity (4/17), a new Beige Book from the Fed (4/18), the Conference Board’s latest index of leading indicators (4/19), the March snapshot of existing home sales from the National Association of Realtors (4/23), March new home sales and a new consumer confidence index from the Conference Board (4/24), March durable goods orders (4/26), the final April University of Michigan consumer sentiment index and the first estimate of Q1 GDP from the Bureau of Economic Analysis (4/27), and then March consumer spending and pending home sales and the March PCE price index (4/30).
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All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). 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The Nifty 50 (NTFE 50) is a well-diversified 50-stock index accounting for 13 sectors of the Indian economy. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The FTSE TWSE Taiwan 50 Index consists of the largest 50 companies by full market value, and is also the first narrow-based index published in Taiwan. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue-Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. The MICEX 10 Index is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. 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1 – bloomberg.com/markets/stocks [3/29/18]
5 – investing.com/economic-
11 – msci.com/end-of-day-data-
12 – money.cnn.com/data/
13 – coindesk.com/price/ [3/29/18]
14 – marketwatch.com/investing/
16 – freddiemac.com/pmms/archive.
17 – markets.wsj.com/us [3/29/18]