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Stocks little changed despite strong jobs data, earnings results

Our emotions cause us to plunge into stocks at their euphoric highs, and to bail out as they reach depressing lows – precisely the opposite of what the cool logic of common sense would prescribe. – John Bogle

There was no shortage of potential market-moving news and data last week with additional first quarter earnings reports, the April employment report and a Federal Reserve meeting. But when the final bell sounded to end the trading week, the S&P 500 Index barely budged and posted only a modest gain. Nonetheless, this benchmark is off to its best start to a year since 1987 as it has produced a total return of 18.3% through Friday’s close. The one constant last week was earnings as quarterly profit reports continue to be better than expected. More than half of S&P 500 companies have reported earnings and about 75% of them have topped expectations with average earnings growth of about 1%. While that may not sound very good, it is much better than the projected earnings decline of about 4% in the first quarter. Blue chips such as Apple, General Electric, McDonald’s, Merck and Pfizer were just a few of the companies that beat analysts’ estimates last week. Even though the stock market was up only slightly, there was pressure on stocks mid-week after the Federal Open Market Committee (FOMC) meeting and Fed Chairman Jerome Powell’s news conference. As expected, the Fed left interest rates unchanged and reiterated that it would be patient with regard to any further rate hikes. The Fed’s statement acknowledged that economic growth and job gains were solid with low unemployment and no inflationary pressures. However, any hope that the Fed would consider an interest rate cut were dashed when Chairman Powell said that the Fed believes that low inflation is “transitory”. Stocks sold off after these comments as many investors thought the Fed would at least consider lowering rates with inflation running below its target. A stronger than expected April jobs report released on Friday was just what the market needed to erase the losses suffered on the two previous days. The report showed that 263,000 new jobs were created in April and that the unemployment rate fell to a 49-year low of 3.6%. Although wage growth remained unchanged for the past 12 months at 3.2%, the solid jobs report should continue to support consumer spending in the second quarter.

Last Week

The March core personal consumption expenditures (PCE) index, the Federal Reserve’s preferred inflation measure, was flat, which dropped the yearly rate to 1.6%, the lowest rate since September 2017 and below the Fed’s target of 2%. Consumer spending in March was strong, posting the biggest monthly gain in 10 years. Pending home sales were also strong in March as mortgage rates fell to their lowest level in over a year.  On the negative side, the ISM manufacturing index was below expectations and showed the weakest rate of growth since October 2016 and construction spending also declined more than forecast as public and private construction were both weak.

In the never-ending trade talks with China, Treasury Secretary Steven Mnuchin was optimistic as talks resumed this week and White House Chief of Staff Mick Mulvaney said that talks would be resolved one way or another within the next two weeks.

For the week, the Dow Jones Industrial Average slipped 38 points to close at 26,504 and the S&P 500 Index rose 0.2% to close at 2,945. The Nasdaq Composite Index also added 0.2% to close at 8,164.

This Week

This will be a relatively light week for economic data and two inflation reports will be the primary focus. The core April producer price index (PPI), which excludes often-volatile food and energy prices, is expected to increase just modestly after posting a healthy increase in March while the core consumer price index (CPI) is forecast to register a higher increase but post a year-over-year rise of 2.1%, slightly ahead of the March increase.

Among the most prominent companies scheduled to report first quarter earnings this week are American International Group, McKesson, Cardinal Health, Tyson Foods, Sysco, Anheuser-Busch InBev, Emerson Electric, Walt Disney, Marriott International, Viacom, Occidental Petroleum, Marathon Petroleum, Chesapeake Energy and Duke Energy.

Portfolio Strategy

If the odds of an interest rate cut by the Federal Reserve were low after its meeting last week, they were nonexistent following the April employment report released last Friday. Certainly after the strong first quarter gross domestic product (GDP) report of 3.2%, investors would have realized that an interest rate cut was not likely anytime soon. Yet the federal funds futures market believed there was better than 50-50 chance that a quarter-point drop in the fed funds rate would occur by December. Surprisingly low inflation also sparked talk of a possible rate reduction in the foreseeable future. The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) index, declined to 1.6% in March, its lowest level in nearly 20 months. It’s understandable that some economists would be recommending that the Federal Reserve reduce interest rates with inflation running below its target rate of 2%. However, the stronger than expected employment report in April coupled with an unemployment rate of 3.6%, the lowest rate in 49 years, eliminated any chance that the Fed would lower rates at this time, despite demands by President Trump and his economic advisers that they do so. Unless the economy deteriorates a lot further, expect the Federal Reserve to stand pat for the time being and make its monetary policy decisions only as economic data becomes available.