I call investing the greatest business in the world…because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it. – Warren Buffett
The late New York Yankees Hall of Fame catcher Yogi Berra once said that “it ain’t over till it’s over” and that quote could have been applied to last week’s stock market. Through the close of business on Thursday, stocks were headed for a banner week as all three major stock averages were holding on to impressive gains. The Federal Open Market Committee (FOMC) ended its two-day meeting on Wednesday and decided to leave the federal funds rate unchanged at between 2.25% and 2.50%, a decision that was widely expected. Citing slowing economic growth and softer inflation, the Fed also projected that there would be no further interest rate hikes in 2019 and that it would end its balance sheet reduction of security holdings by September. In his press conference after the meeting, Federal Reserve Chairman Jerome Powell also commented that Chinese and European economies had slowed “substantially”, bolstering the Fed’s case for patience in the face of declining inflation and weakening global economic conditions. Although the Fed lowered its estimate for U.S. growth, it emphasized that the labor market was still strong and that overall, the economy was in good shape. With further Fed tightening off the table for the balance of the year, investors cheered the news and piled into equities, sending the stock market higher. But economic data released on Friday painted a grim picture both here and abroad. Manufacturing data out of Europe fell to its lowest level since April 2013 and foreshadowed slower economic growth in the months ahead. In the U.S., several pieces of manufacturing data were also weaker, including one that reached its lowest level in 21 months. The softer than expected data sent Treasury yields lower (bond prices move inversely to yields) and caused stocks to sell off as the S&P 500 Index dropped nearly 2%. The loss wiped out the market gains for the week and the benchmark index wound up closing modestly lower. What looked like a promising and positive week for stocks through Thursday all came crashing down on the last day of the week, Friday.
Leading economic indicators in February rose modestly, the first increase since September, and were helped by higher stock prices, lower interest rates and easier access to credit. Weekly jobless claims dropped 9,000 to 221,000, a bigger decline than was expected, and a further sign that the labor market remains strong. February existing home sales were better than expected, jumping nearly 12%, as rising wages, falling mortgage rates and slower gains in home prices all contributed to the increase.
Corporate earnings news last week was mixed as FedEx and Nike reported weaker than expected sales growth and earnings and issued disappointing guidance for the year while computer chip manufacturer Micron Technology beat earnings estimates and Apple Computer received an upgrade by an analyst.
For the week, the Dow Jones Industrial Average fell 1.3% to close at 25,502 and the S&P 500 Index dropped 0.8% to close at 2,800. The Nasdaq Composite Index slumped 0.6% to close at 7,642.
Final fourth quarter gross domestic product (GDP) is expected to remain the same at 2.6% while the March Chicago Purchasing Manager’s Index (PMI) is expected to decline slightly but remain above 60, a level consistent with healthy expansion. February housing starts and new home sales should approximate last months’ solid numbers and both the March consumer confidence index and the University of Michigan consumer sentiment index should remain elevated and even with those in February.
Among the most notable companies scheduled to report fourth quarter earnings this week are Red Hat, Accenture, Paychex, CarMax, McCormick, KB Home and Lennar.
Another possible reason for the sell-off in stocks on Friday might have the inversion of the yield curve between the 1-year Treasury and the 10-year Treasury. In fact, the yield on both the 3-month Treasury Bill (2.46%) and the 1-year Treasury Note (2.45%) now exceed the yield on the 10-year Treasury Note (2.44%). The yield curve is typically upward sloping, with longer-term yields higher than shorter-term yields, and that relationship still exists between the 2-year Treasury (2.31%) and the 10-year, but the difference is now only 13 basis points. (A basis point is one hundredth of one percent). In the past, an inversion has generally been a reliable indicator that a recession may be looming in the future. But this relationship would have to occur over a period of weeks or months to have any reliability and even then, recessions usually don’t begin until six to eighteen months after an inversion. Stocks have a tendency to continue to rally despite this early warning sign. Other economic indicators also bear watching, such as the most recent leading economic indicators reading in February, which rose modestly. Weaker economic growth overseas has caused yields on the benchmark Japanese and German 10-year bonds to dip below zero percent, which could have been partly responsible for the decline in the 10-year Treasury yield. The corporate high yield bond market also bears watching and it held up quite well on Friday compared to the nearly 2% drop in the S&P 500 Index. It’s far too early to forecast with any certainty the onset of a recession and there is no reason to panic over the inversion that occurred last week.
Since I will be out of the office on vacation next week and won’t return until the following week, the next Weekly Market Commentary will be sent on Monday April 8th.