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U.S. equity prices fought a pitched seesaw battle last week as the countervailing forces of trade tariffs and inflation expectations played out.



Weekly Market Overview | March 12, 2018

March 12, 2018
By Peter Sorrentino, Chief Investment Officer

U.S. equity prices fought a pitched seesaw battle last week, as the countervailing forces of trade tariffs and inflation expectations played out. By the closing bell on Friday, optimism had won out, thanks in large part to a strong, yet benign, employment report. This enabled the trends we have been witnessing since the start of the year to reemerge, as the smaller companies of the Russell 2000® Index posted a gain of 4.2% to the larger S&P 500® Index’s gain of 3.6%. The performance pattern in the international markets reverted as well, with Emerging Markets leading the developed MSCI EAFE® markets 2.1% to 1.8%. Among the U.S. economic sectors, financial service and industrials led the way, posting a 4.4% advance. Utilities and consumer staples resumed their roles as performance laggards, adding 0.9% and 1.6%, respectively, for the week. Crude oil and natural gas prices added 1.3% for the week, while precious metals were largely unchanged. With the spring planting season almost upon us, agricultural commodity prices continued to vary widely, as witnessed by last week’s 2.2% gain for cotton, juxtaposed with the 4.3% loss for sugar.

The impact of last Friday’s employment report on the market was quite impressive. The number was well outside the range of forecast, and it was accompanied by upward revisions to the prior two months. This reassured investors that U.S. economic growth and consumer health were both still very much alive and well. Of equal importance, however, was the very tame increase in average hourly earnings. It was the rate of increase in earnings in the past two reports that most worried investors, fearing the Federal Reserve would be compelled to add a fourth rate hike this year to tamp down inflation. Deeper in the report (and largely overlooked by the financial press), was the unexpectedly strong employment growth in manufacturing, construction and, believe it or not, mining. These results do, however, fit with the economic forecast of Comerica’s Chief Economist, Dr. Robert Dye, and with our investment outlook. After bottoming in 2010, manufacturing jobs in the U.S. increased by 2.6 million positions, which was even more important for consumer spending, as manufacturing jobs pay 19% more than the U.S. average. The relatively tame increase in average hourly earnings may be attributable to the lack of change in the U-6 rate of unemployment. U-6 is the most encompassing measure of the available workforce, and it seems to have recently stalled its decline at 8.2%. So, while the labor force has tightened up, there appears to be sufficient capacity available to forestall rapid wage inflation.

 

Source: All statistics herein obtained from Bloomberg.

 

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