Global equities accentuate the negative

Brian Nick

The past week’s market highlights:

Quote of the week:

“There is no friendship in trade.” – Cornelius Vanderbilt
As part of our new format, we are presenting our featured weekly topics in the context of the major themes listed below from the Nuveen 2018 Outlook:
  • U.S. economy: Conditions are still running closer to “just right” than “too hot.”
  • Global economy: Overseas economies are improving, but the time for surprises is over.
  • Policy watch: In an unusual twist, U.S. fiscal and monetary policies are diverging.
  • Fixed income: Bond markets offer few places to run to, even fewer places to hide.
  • Equities: Stronger corporate earnings growth should drive stock prices higher.

Equities: March madness rolls on

We’re in an odd, “in-between” time of year. Spring officially began on March 20, yet the Northeast was hit with another snowstorm the following day. For basketball fans, the NCAA will crown its men’s champion on April 2, while the NBA playoffs don’t begin until around tax time.

On Wall Street, investors recently have had little “A-List” economic data to sink their teeth into, and the next key economic report—March payrolls—won’t be released until April 6. Moreover, fourth-quarter earnings season is over. And the Fed, thanks to its carefully scripted forward guidance, didn’t surprise markets by raising rates on March 21.

Investors looking to fill the information void have begun latching on to “lower-tier” data, which injected fresh turbulence into global equity markets. For example, on March 19, the cascading effect from the woes of a small data firm triggered a 2.1% drop in the Technology sector.
Then, on March 22, trade-war concerns pummeled global equities amid the Trump administration’s decision to impose 25% tariffs on up to $60 billion in annual imports from China. The White House claims the tax is in retaliation for Beijing’s poaching of intellectual property from U.S. firms. China has already proposed retaliatory tariffs on U.S. goods worth around $3 billion.
While especially harmful to certain sectors (e.g., Pharmaceuticals, Auto, and Technology) and countries (e.g., Korea and Taiwan), President Trump’s levies aren’t likely to generate significant economic headwinds on their own. The steel and aluminum tariffs, in particular, have been all but defanged, as virtually every major exporter of steel into the U.S. has received at least a temporary exemption from the policy. Regarding the China tariffs, a 30-day window for “comments” (i.e., lobbying) to the U.S. Trade Representative’s office raises the prospect that this salvo may well cast a smaller economic shadow than first feared. That said, a full-blown trade war could seriously threaten the synchronized global recovery.
Against this tumultuous backdrop, the S&P 500 tumbled around 6% for the week, extending its prior week’s losses and erasing its year-to-date gain. Europe’s STOXX 600 Index also slumped, dropping 3.1% (in euro terms), to a 13-month low. For their part, equity bulls—seemingly in short supply these days—can take comfort from several of the past week’s data releases for February. Among the reports pointing to continued strength in the U.S. economy were better-than-expected durable goods and core capital-goods orders, and the sixth consecutive increase in the Conference Board’s index of leading economic indicators.

Policy watch: Powell marches in with authority

The March 21 Federal Open Market Committee (FOMC) meeting was the first helmed by new Fed Chair Jerome Powell. As expected, the meeting ended with a 25-basis-point (0.25%) increase in the federal funds rate, to a target range of 1.50%-1.75%. This move marked the sixth hike of the current cycle and the first of 2018. The Fed anticipates two more hikes this year and a slightly steeper path of tightening through 2020. On balance, investors appeared unfazed by the news, reflecting confidence in the Fed’s overall assessment that the economy exhibits a healthy mix of growth and inflation.
Powell appeared sure-footed in his post-meeting press conference, citing a mostly upbeat U.S. economy. He conveyed that the Fed was on track toward interest-rate normalization and expects a “neutral” federal funds rate (which neither stimulates nor restrains economic growth) of 3.0% by the end of 2019. The most significant change from the prior FOMC meeting was an uptick in the median rate estimate for year-end 2020 to 3.4%, from 3.1%.
More immediately, the Fed’s projection of just two additional rate hikes in 2018 (for a total of three), instead of three more (for a total of four), might have been based on recent weakness in private-sector data. However, we still expect the Fed to raise rates three more times before year end.
Fixed-income markets digested Powell’s comments with relative ease, resulting in only modest moves in Treasuries. The yield on the bellwether 10-year note ticked up briefly after the announcement but ended the session unchanged from the prior day, at 2.89%. Yields declined over the last two days of the week as investors sought safe havens amid escalating concerns over a trade war. (Yields and price move in opposite directions.) Overall, the 10-year ended the week 2 basis points lower, at 2.82%.
For more information on our view of the Federal Reserve’s March meeting, see The March Fed Meeting: Powell takes the mic with a hike.
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen LLC, its affiliates or other Nuveen staff.
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