The Markets in March

The first quarter of 2018 began with strong market gains, but it did not end that way. March was not a good month for the benchmark indexes here, except for the small caps of the Russell 2000. Otherwise, each of the indexes closed March in the red, led by the Dow, which was followed by the Global Dow, Nasdaq, and the S&P 500. March brought more concerns for investors with the administration’s imposition of tariffs on steel and aluminum imports and the threat of a trade war with China. Much of the month saw retaliatory threats lobbed across the Pacific.

The first quarter as a whole saw only the Nasdaq post modest gains. The Dow fell by almost 2.5% by the end of the quarter, far outpacing losses suffered by other major indexes. The Global Dow fell nearly 2.0%, followed by the S&P 500 and the Russell 2000. Prices for 10-year Treasuries fell by the end of the quarter, pushing yields up by 32 basis points. Oil began the quarter at $61.55 per barrel and remained over $60.00 for much of the first quarter. Gold closed the quarter at roughly $1,329.60 — ahead of where it opened the quarter ($1,305.10). Regular gasoline, at $2.548 per gallon on February 26, soared to $2.648 on the 26th of March.

Economic News

Employment: Total employment rose by 313,000 in February following January’s revised total of 239,000. Employment gains occurred in retail trade, construction, professional and business services, and manufacturing. The unemployment rate remained at 4.1%. In February, total employment rose by 785,000. Over the year, the number of long-term unemployed was reduced by 369,000. The labor participation rate rose to 63.0%. The employment-population ratio increased to 60.4% in February. The average workweek for all employees increased by 0.1 hour to 34.5 hours in February. Average hourly earnings increased by $0.04 to $26.75. Over the year, average hourly earnings have risen $0.68, or 2.6%.

FOMC/interest rates: The Federal Open Market Committee, meeting for the first time under new chair Jerome Powell, increased the federal funds target rate range by 25 basis points to 1.50%-1.75%. The Committee said the labor market is strong but described economic activity as “moderate.” Inflation moved little since the beginning of the year, yet the Committee expects to see more over the next 12 months. The Committee forecast more rate hikes throughout the remainder of 2018.

GDP/budget: The final estimate of the Q4 gross domestic product showed expansion at an annual rate of 2.9%, according to the Bureau of Economic Analysis. The Q3 GDP grew at an annualized rate of 3.2%. Consumer spending rose 4.0%, with notable increases in durable goods spending (13.7%). As to the government’s budget, the February deficit surged to $215.25 billion, compared to January’s $49.2 billion. The fiscal 2018 deficit (which began in October 2017) is $390.97 billion — an increase of $40.35 billion, or 11.5%, above the deficit over the same period last year.

Inflation/consumer spending: Inflationary pressures continued to grow in February. The personal consumption expenditures (PCE) price index (a measure of what consumers pay for goods and services) ticked up 0.2% for February following a January gain of 0.4%. The core PCE price index (excluding energy and food) also increased 0.2% in February. Personal (pre-tax) income increased 0.4% and disposable personal (after-tax) income climbed 0.4% over the prior month. Personal consumption expenditures (the value of the goods and services purchased by consumers) climbed 0.2% in February, the same increase as the prior month.
• The Consumer Price Index rose 0.2% in February after climbing 0.5% in January. Over the last 12 months ended in February, consumer prices are up 2.2%. Core prices, which exclude food and energy, are up 1.8% for the year.
• The Producer Price Index showed the prices companies receive for goods and services also jumped 0.2% in February. Year-over-year, producer prices have increased 2.8%. Prices less food and energy increased 0.2% for the month and are up 2.5% over the last 12 months.
Housing: Home sales were mixed in February. Total existing-home sales jumped 3.0% in February following a 3.2% dip in January. Year-over-year, existing home sales are up 1.1%. The February median price for existing homes was $241,700, which is 5.9% higher than the February 2017 price of $228,200. Inventory of existing homes for sale rose 4.6%, representing a 3.4-month supply. New home sales fell in February. The Census Bureau’s latest report reveals sales of new single-family homes fell 0.6% in February.

Manufacturing: Industrial production edged up in February, increasing 1.1% compared to a downward-revised 0.3% drop in January. Manufacturing output grew at a rate of 1.2% — its largest gain since October. Capacity utilization for manufacturing also rose 0.7 percentage point in February, coming in at 78.1% — its highest reading since January 2015. New orders for manufactured durable goods climbed 3.1% in February following a 3.5% revised January decrease. For the year, new durable goods orders are up 8.9%.

Imports and exports: The advance report on international trade in goods revealed that the trade gap increased in February from January, rising from $75.3 billion to $75.4 billion. Exports of goods for February jumped 2.2% following January’s 2.4% drop. Imports of goods increased 1.4% after falling 0.2% in January. Still, total imports ($211.9 billion) far exceeded exports ($136.5 billion). Prices for both imported and exported goods and services advanced in February. Import prices rose only 0.4% for the month, while export prices increased 0.2%. For the year, import prices climbed 3.5%, while export prices jumped 3.3%.

International markets: Heightened worries of a trade war dominated international markets, as tariffs imposed by the United States on steel and aluminum went into effect. Trade with China became testy as President Trump announced tariffs on Chinese goods, prompting China to impose tariffs on U.S. imports. Elsewhere, the Bank of England maintained its monetary policy, leaving interest rates at 0.50%. The bank rate has not increased since last November. However, it appears interest rates are going up at some point this year. Most foreign stock indexes were subdued for March, with only a few countries’ indexes making marginal gains. European stocks dipped to lows approaching early 2017 values. Most major Japanese indexes are well in the red year-to-date, while China’s benchmark stock index has felt the brunt of the apparent trade war with the United States.

Consumer sentiment: Consumer confidence, as measured by The Conference Board Consumer Confidence Index®, decreased in March following an increase in February. The index sits at 127.7, down from 130.8 in February (an 18-year high). According to the report, consumer expectations were less positive in their assessment of current economic conditions, while consumers’ short-term expectations were tempered as well.

Eye on the Month Ahead

Moving to the second quarter of 2018, the economy is expected to maintain its path of relative strength. However, if news out of Washington continues to concern investors, market volatility is likely to continue.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/ Market Data (oil spot price, WTI Cushing, OK); (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.

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