- EM continues to hold up well despite risks. Year to date, the MSCI Emerging Markets (EM) Index has returned 1.8%, ahead of both the developed international equity benchmark (MSCI EAFE Index), which has returned 0.5%, and the S&P 500 Index, which has lost 0.6%. This performance is encouraging given the backdrop of rising trade, geopolitical, and interest rate risks.
- Geopolitical risk rising. Wednesday’s volatile session was marked by increasing expectations of a U.S. military strike on Syria and the rising risk of conflict with Russia and Iran. Higher oil prices (Brent now over $70/bbl.) followed, also driven by the Yemen-Saudi conflict. History shows that the market impact of contained military conflicts–as we hope this one may be–tend to be manageable, and we continue to believe economic and market fundamentals are strong enough to offset heightened geopolitical risk.
- Stimulus still significantly bigger than tariffs. It’s still unclear if recently announced tariffs will be imposed, and there is no doubt risk of market disruption from a trade war with China is still present. However, even the higher total value of tariffs (estimated at $81 billion including an additional round of possible retaliation from China) pales versus the potential $800 billion in stimulus being put into the U.S. economy in 2018 via tax cuts, deficit spending, and repatriation of overseas cash.
- U.S. and EM expected to produce the strongest 2018 earnings growth.Earnings for both the S&P 500 and MSCI EM Index may approach 20% this year, well above the low-teens pace developed international markets are expected to produce based on FactSet consensus estimates. The earnings outlook continues to support our preference for the U.S. and EM over developed international equities in our tactical asset allocation recommendations.
- FOMC (Federal Open Market Committee) minutes marginally more hawkish, but little bond market reaction. Members of the Federal Reserve’s policy committee agreed that economic growth had improved (as of the March 20-21 meeting) and that the odds of inflation moving toward target had increased. The bond market hardly budged despite this somewhat hawkish tone, suggesting that three rate hikes in 2018 still remains the most likely scenario (and still our view). The fed fund futures market priced in only a marginally higher likelihood of four (or more) rate hikes in 2018, whereas yields across the curve were little changed.
- Jobless claims fell. Further evidence of a tight labor market was provided by this week’s jobless claims report, as applications for unemployment benefits fell 9,000 to a seasonally adjusted 233k, versus expectations of 230k. With the unemployment rate(4.1%) and underemployment rate (8.0%) both at cycle lows, and the solid pace of jobs gains this year near 200K per month, all signs continue to point to a healthy and gradually tightening labor market.
- Fear Friday the 13th? Tomorrow is a day to avoid those black cats and mirrors, with the first Friday the 13th on the calendar since last October. Although we find this totally random, wouldn’t you know that Friday the 13th has had weaker performance for stocks than your average Friday? That’s right; the average gain on Friday the 13th (since 1928*) for the S&P 500 has been only 0.02%, versus the average Friday gain of 0.05%. Not to mention, the last time there was a Friday the 13th during April was in 2012, when the S&P 500 dropped 1.25%–for the worst Friday-the-13th drop going back 15 years. Today on the LPL Research blog, we will take a closer look at this fun phenomenon.
*Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.
Monitoring the Week Ahead
- Weekly Jobless Claims (Apr 7)
- France: CPI (Mar)
- Eurozone: Industrial Production (Feb)
- ECB: Monetary Policy Meeting Accounts
- Bank of Mexico: Overnight Rate
- BOE: Credit Conditions and Bank Liabilities Surveys
- China: Trade Balance (Mar)
- China: Imports & Exports (Mar)
- Univ. of Michigan Sentiment (Apr)
- Germany: CPI (Mar)
- Eurozone: Trade Balance (Feb)
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