Nine years ago, on March 9, 2009, the stock market bottomed as plans to end overly strict mark-to-market accounting rules took shape. Banks were no longer forced to write-down assets to illiquid, un-traded market prices. Since then, profits have soared as entrepreneurs and innovators have overcome the headwinds of two tax hikes and a rise in regulations. Starting last year, these government-created headwinds began to shift, as deregulation and tax cuts became tailwinds for the economy and the markets. Rising rates and tariff talk have some investors on edge, but these fears are overblown and the fundamentals point towards continued growth.
Markets rallied last week as concerns about President Trump’s steel and aluminum tariffs eased; also, a surprisingly strong February jobs report buoyed investor confidence. Last week’s tariff announcement had weighed on stocks as investors feared a rise in protectionist policies and a potential trade war. On Wednesday, news of Gary Cohn’s resignation as the President’s top economic advisor added to concerns; many viewed the former Goldman Sachs executive as a strong and influential advocate for free trade. On Thursday, though, the President signed the tariff proclamation with a “carve out” for NAFTA partners Canada and Mexico which had applied for, and received, exemptions. Others, including Australia, Japan, South Korea, the European Union, Brazil, and Argentina, are also lining up for exemptions. The process suggests that the tariff is, for all intents and purposes, aimed at China. China’s economy remains relatively closed; despite much progress over the past several decades, foreign companies face considerable restrictions accessing its markets and limited protections on, for example, intellectual property. In contrast, Chinese companies enjoy full legal protection, and nearly unfettered access to the U.S. markets. The tariffs, then, could open a dialogue on trade relations aimed at leveling the playing field, a goal widely shared by corporate executives. Still, the threat of a potential trade war weighed on automotive and commercial truck manufacturers, engineering and construction firms, containerized shipping companies, and others; these companies should recapture their lost ground as the details of the tariff policies, and exemptions, are clarified.
Last week also included a potential thaw in U.S.-North Korea relations. On Tuesday, envoys from South Korea relayed an oral message from North Korean leader Kim Jong Un of his openness to denuclearization talks with the U.S. in exchange for a guarantee of the regime’s safety. On Friday, President Trump confirmed his willingness to meet directly with Mr. Kim, although skeptics remain cautious. The potential for a first-ever meeting between the heads of state may reduce investor anxieties regarding potential conflict in Asia.
The Dow Jones Industrial Average surged 440 points on Friday following the release of the February jobs report. The addition of 313,000 jobs far exceeded expectations for a 200,000 increase. The unemployment rate remained at 4.1%, and average hourly earnings rose 0.1%, below the 0.3% estimate. The year-over-year wage increase fell from a downwardly revised 2.8% reading in January to 2.6% in February. Last month, the higher-than-expected wage growth triggered a sharp selloff in stocks as investors viewed the data as a sign of accelerating inflation. February’s deceleration in wage growth corroborated data indicating moderating price increases, and should ease inflationary concerns. Indeed, the increase in wages in the January and February jobs reports likely included one-time bonuses announced by companies in the wake of tax reform. Last week, stocks rallied even as the yield on the 10-year U.S. Treasury Note rose slightly; investors are apparently comfortable with the current pace of inflation and outlook for interest rates.
*Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week's Headlines
1. February saw 313,000 new jobs added, according to the latest employment report from the Bureau of Labor Statistics. Notable job gains occurred in construction (61,000), retail trade (50,000), professional and business services (50,000), and manufacturing (31,000). The unemployment rate remained at 4.1% for the fifth consecutive month. The average workweek for all employees rose by 0.1 hour to 34.5 hours in February. Average hourly earnings for all employees rose by $0.04 to $26.75, following a $0.07 gain in January. Over the year, average hourly earnings have increased by $0.68, or 2.6%. Overall, the number of significant new jobs added is a positive, while wages increased by only 0.1% for the month. The year-over-year gain slowed in February (2.6%) compared to January (2.9%), which was the largest gain since 2009. This should be positive news for investors who shunned the market for fear of rising inflation and interest rates.
2. The non-manufacturing (services) sector of the economy expanded in February, but at a slightly slower pace than the previous month, according to the latest report from the Institute for Supply Management. Supply managers indicated that manufacturing business activity, and new orders expanded, while employment and prices decreased last month. According to the report, the majority of respondents remain positive about business conditions and the economy.
3. A report that could bolster President Trump's trade policy of increasing tariffs on imports, January's goods and services trade deficit expanded sharply to $56.6 billion, up $2.7 billion from the $53.9 billion December revised deficit. In January, exports narrowed by $2.7 billion, while imports remained relatively the same, down less than $0.1 billion from December's imports. Year-over-year, the goods and services deficit increased $7.9 billion, or 16.2%, from January 2017. Exports increased $9.7 billion, or 5.1%. Imports increased $17.6 billion, or 7.4%.
4. In the week ended March 3, there were 231,000 initial claims for unemployment insurance, an increase of 21,000 from the previous week's level. The advance insured unemployment rate dipped to 1.3% for the week ended February 24. The advance number of those receiving unemployment insurance benefits during the week ended February 24 was 1,870,000, a decrease of 64,000 from the prior week's level, which was revised up by 3,000.
Eye on the Week Ahead
Fears of rising inflation and interest rates have worried investors over the past several weeks. Important inflationary indicators are out this week with the Consumer Price Index, Producer Price Index, and retail sales report. While consumer spending has been modest, prices for consumer goods and services have been rising in a sure sign of inflationary pressures.
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