Here’s one truth that perhaps your typical investment counselor would disagree with: if you’re comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what! Someone will always be getting richer faster than you. This is not a tragedy. – Charlie Munger
The major stock averages closed slightly lower last week despite a plethora of economic data, news items and geopolitical events that gave investors a lot to digest. The fact that losses were limited was a testament to the resiliency of the stock market and its ability to maintain its ground in the face of uncertainty. The reports on the health of the labor market last week were decidedly mixed. The ADP report on private payrolls showed that 263,000 jobs had been created in March, well above the estimate of 185,000, as there was strong jobs growth in the goods producing sectors such as construction, manufacturing and mining. The weekly jobless claims were also favorable as claims fell by 25,000 to 234,000, much better than the forecast of 250,000. However, the March employment report released by the government was far weaker than expected. It showed that jobs grew by only 98,000, far fewer than the 180,000 that had been expected, as winter-like weather in the Northeast may have been a contributing factor. Although the unemployment rate dropped to 4.5%, the lowest level in nearly ten years, wage growth increased only modestly. Minutes released from the March Federal Open Market Committee (FOMC) meeting also cast a pall over the stock market. They showed that the Fed was looking to reduce the $4.5 trillion of government and mortgage-backed securities on its balance sheet later this year. Fed officials also expressed concern over weak first quarter GDP growth, though they viewed any slowdown as temporary, and noted the lofty valuations of stocks. Most damaging might have been their forecast that any effect from President Trump’s pro-growth policies on the economy would not be felt until 2018. Adding insult to injury, House Speaker Paul Ryan made comments to the effect that tax reform was still a work in progress and likely will be much further down the road than people expect. Geopolitical uncertainty was also on display last week as President Trump met with Chinese President Xi Jinping and the U.S. responded to a lethal Syrian government chemical attack on its people by attacking key air bases. Yet through all of this potentially damaging news and disappointing data, the stock market was able to hold its own.
While the jobs data last week was mixed, the other economic data was mostly positive. The ISM manufacturing index for March beat estimates but the ISM non-manufacturing index or services sector index was slightly below estimates, though both indices were comfortably in expansion territory. Construction spending in February rose to its highest level in almost 11 years and February factory orders increased by 1%, in line with expectations. On the negative side, automobile sales in March fell to a 2-year low due to higher interest rates, a slowing of the replacement cycle and a growing price gap between new and used cars.
For the week, the Dow Jones Industrial Average slipped by 7 points and closed virtually flat at 20,656 and the S&P 500 Index fell 0.3% to close at 2,355. The Nasdaq Composite Index declined 0.6% to close at 5,877.
Investors will get a much better read on inflation this week as March import prices are expected to decline slightly while both the producer price index (PPI) and the consumer price index (CPI) are expected to be flat. The University of Michigan preliminary consumer sentiment index for April should show that consumer confidence still remains high but this will not be reflected in the March retail sales data, which are also expected to be flat.
The month of April has typically been a good month for stocks. The S&P 500 Index has gained an average of 1.6% in April since 1983 and 2.1% since 2009, the beginning of the current bull market.
This week marks the beginning of earnings season and first quarter profit growth is expected to be excellent. Banks will lead the earnings parade as Citigroup, Wells Fargo, PNC Financial Services and JP Morgan Chase are all scheduled to report. All U.S. markets are closed for Good Friday.
Amid all of the uncertainty around passage of Trump’s pro-growth agenda and the upcoming first quarter earnings season, one possible port in the storm may be real estate investment trusts or REITs. Over the past 12 months as the S&P 500 Index has risen over 18%, the real estate sector has gained only about 6%. For the first quarter of this year, this broad-based index rose just over 6% while the MSCI U.S. REIT Index posted a return of 1%. Because REITs have lagged the overall market and have been out of favor, now might be the time for them to outperform. REITs are companies that buy such property as office buildings, hotels, shopping centers, apartment buildings, health care facilities and storage facilities. They offer high potential for investment income and provide some growth and are typically more volatile than bonds. Part of the reason for their recent underperformance is related to the rise in the 10-year Treasury yield from 1.4% last July to 2.4% on Friday. REITs are interest-rate sensitive and are similar to utility stocks in that regard. They are viewed as bond proxies and bond prices fall when interest rates rise. The typical REIT has an average yield of about 4%, which compares favorably with yields on Treasuries, investment grade, intermediate-term corporate bonds and money market funds. REITs also help diversify the risks associates with both stocks and bonds. One of the best ways for investors to participate in this space is through the Vanguard REIT ETF, which provides investors with a diversified, low-cost investment vehicle that attempts to replicate the performance of the MSCI U.S. REIT Index.