It was another generally positive week for the markets, despite the news flow from President Trump’s European road trip. Part of this is attributed to the measured response by Chinese authorities in response to the latest round of trade threats. This heartened the market for U.S. exporters leading to solid gains for the likes of Intel, UTX, Boeing and Caterpillar. Another factor fueling the market is the string of large merger and acquisition deals being announced. Last Thursday, the technology sector led the major indices higher as Broadcom announced a $18.9 billion offer for shares of CA Technologies, formerly known as Computer Associates. It is no surprise to see that, last week, industrials led the market with a 2.2% gain, followed closely by both technology and consumer discretionary, both advancing 2.1%. The only group to lose ground last week was the utilities sector, slipping 1.2%. Last week was very much a return to the theme of last year, as large cap growth dominated performance. The S&P 500® Index and the Russell 1000 Index gained 1.55% and 1.46%, respectively, compared to the returns for the S&P 600 Index and the Russell 2000® Index that experienced declines of -0.4% and -0.41%, respectively, last week. International equities managed to overcome a slight advance in the exchange value of the U.S. dollar to post gains as well last week, with the MSCI EAFE® Index adding 0.74% and the MSCI Emerging Market Index picking up 2.2%. There was no respite for commodity prices last week, as domestic energy fell 3.7%, and industrial metals declined another 2%. In what can be viewed as a risk, off trade prices for grains and livestock fell around 3% as well. Typically, it does not happen this way. Since grain prices are an input for livestock, they generally move in opposite directions. Lower grain prices improve the margins on livestock and vice versa, so to see the two move in tandem is uncommon. As highlighted by Dr. Robert Dye (Comerica’s Chief Economist) in his review of economic data, initial unemployment claims fell in the first week of July, bearing witness to continued strength in the job market, and June CPI data was slightly below expectation at 0.1%. Prices for U.S. exports rose and imports fell, bolstering domestic balance of trade.
Last year, as the leadership of the Federal Reserve changed, one of the major topics of concern was the prospect for an inverted yield curve, where short-term interest rates exceed those of longer maturities. The occurrence of rate inversions has been a signpost for an impending recession. As the Federal Reserve pursued its mission to normalize monetary policy, many feared that the result would be an inversion. This concern largely faded from view, as in the opening months of this year, yields on longer-dated maturities began to rise. As you can see in Exhibit 1, since late May, the situation has changed. The yield curve has flattened considerably as short-term rates continue to rise and long rates have measurably retreated, largely due to strong demand both domestic and foreign. Performance within the equity market has picked up on this as well, with the resurgence of growth stocks and the underperformance of financials. Our view is that the likelihood of a recession in the near term is low, and we do not see a rate inversion occurring. This leads to the conclusion that investors are handicapping the likelihood that interest rates are not going higher anytime soon. This is an assumption that may prove difficult to sustain in the face of a growing supply as the Treasury comes to market to fund the widening budget gap. Looking at the performance and valuation differential between the leading sectors and the balance of the market, there is a very strong case to be made for de-risking portfolios.
Exhibit 1 (Source: Bloomberg)
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Source: Unless otherwise noted, all statistics herein obtained from Bloomberg.
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