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Markets enjoyed a relief rally last week despite evidence of stronger inflation and mixed data on consumer spending.



Weekly Market Overview | February 19, 2018

February 19, 2018
By Peter Sorrentino, Chief Investment Officer

Markets enjoyed a relief rally last week despite evidence of stronger inflation and mixed data on consumer spending. Globally, it was a good week for equity prices, as the major indices managed returns in excess of 4%. Domestic equity prices across the board found support, with the S&P 500® Index gaining 4.374% and the Russell 2000® Index adding 4.447%. Emerging markets advanced 4.977%, while the developed foreign markets (EAFE® Index) delivered a 4.184% gain. The strongest domestic sectors were information technology and industrials, posting gains of 5.745% and 4.715%, respectively. Some of the strength in technology is attributable to the 10.25% bounce in Apple shares, but the boost from Cisco Systems and Applied Materials on strong earnings, as well as the 31.6% gain in shares of services provider CSRA on a takeover bid from defense giant General Dynamics, changed the face of sector leadership. The laggards last week were again energy and utility shares, which only managed to gain 2.175% and 3.213%, respectively. Thanks to a roughly 2%1 decline of the U.S. dollar last week, most commodity prices enjoyed a tailwind with energy prices gaining an average of 3.5% and industrial metals surging an average 6%. Treasury yields added 8 basis points along the three- to seven-year section of the curve, while the ten-year and beyond maturities experienced 0 to 2 basis point gains.

Late last week, the most recent data on residential construction was released, and it showed surprising strength in new construction. As Comerica’s Chief Economist, Dr. Robert Dye, has pointed out in his work, one of the distinguishing factors of this recovery has been the performance, or lack thereof, from housing construction. Despite strong price gains and low mortgage rates, the inventory of available housing persists at historically low levels. Now, whether driven by stronger employment and wage gains, or the fear of missing out on low cost mortgages, the sector appears to be rumbling to life. This has potential major implications for stock market performance. Historically, changes in housing activity led to changes in consumer spending, with roughly a six-month lag. An uptick in housing has positive implications for the consumer discretionary sector, as new homeowners furnish and decorate their new abodes. Even auto sales benefit as change begets change. That old ride looks out of place in the new surroundings. This again falls into place with Dr. Dye’s forecast that given the length of this recovery, a replacement cycle for autos was a distinct possibility. While it was a single data point, it could prove to be a critical one for the economy and stock prices in the back half of this year.

 

1Refers to the trade weighted value of the dollar versus a basket of currencies weighted by their international trade volume

 


Source: All statistics herein obtained from Bloomberg.

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