Listening To The Markets

The markets are sending us interesting messages.

A lot has happened in the markets so far in 2018. U.S. stocks had strong returns and record highs throughout January. That was followed by a brief correction and a rebound.

Global markets generally have been correlated with the U.S. indexes, but there has been a lot of disparity in returns when we look at the details.

While U.S. stocks receive most of the attention, the best returns have been outside the United States in emerging markets. Latin America. Brazil and Mexico have been leading the way lately.

We also see disparity when we focus only on U.S. stocks. The NASDAQ 100 and the technology sector didn’t have a full 10% correction in February, based on closing prices. Also, they rebounded strongly after reaching their February lows. They both have solid double-digit-percentage returns so far in 2018 and are making new all-time highs.

Growth stocks and value stocks have gone their separate ways as well. Growth has been well ahead of value for a long time, and it still is ahead so far in 2018. For example, the S&P 500 Growth index returned 8.22% for 2018 through March 9, while the S&P 500 Value index returned 0.52%. For the month of March, though, value is trailing growth by much smaller margins. This just might be the early stage of the long-awaited value stock turnaround.

There’s a similar story for small company stocks. They trailed large company indexes throughout 2017 and through the peak in late January, but they held up better in the correction and soared ahead after the bottom.

For example, the S&P 500 returned 2.66% in the first nine days of March, but the S&P 600 returned 5.37%. Likewise, the Russell 1000 returned 2.88% while the Russell 2000 returned 5.70% for the first nine days of March.

Though most sectors in the stock indexes have positive returns for the year (except utilities and telecommunications), the strongest sectors by far are technology, financials, industrials and health care.

If you’re a sector exchange-traded fund (ETF) investor, study the sectors closely. The dominant stocks in the S&P Consumer Discretionary sector are Amazon, Netflix and Booking (formerly Priceline). Most people think of these as tech stocks, but you’ll miss their returns if you invest only in a tech sector ETF.

Bonds continue to do poorly. That’s not a surprise, as interest rates and inflation have been rising.

Commodities are lagging stocks, but generally have positive returns for the year. I expect commodity returns to improve as global growth continues and inflation rises.

Put it all together, and the markets expect continued global growth with very low inflation. They also expect interest rates to keep rising, but not high enough to slow growth or stock prices. Last Friday’s Employment Situation reports support this view. They showed strong job growth but only modest wage growth.

The markets also seem to expect a trade war or some disruption in the globalization trend. That is the most likely explanation for why small company stocks suddenly are doing as well or better than large company stocks.

For now, the best strategy is to let your winners run. However, be thinking about the next big turn, how you’ll identify it and what your strategy will be.

Some notable anniversaries: The media continue to ignore or downplay key anniversaries related to the financial crisis. The last week contained two such notable dates. The first was the 10-year anniversary of the collapse of investment bank Bear Stearns. The second was the eight-year mark since the stock market bottom in March 2009.

The Data

The heavily watched Employment Situation reports were issued last Friday and moved the markets. The report said 313,000 new jobs were created in the last month, a number that was well above expectations. We now have the highest three-month increase in jobs since July 2016. Average hourly earnings increased only 0.1% for the month and 2.6% over three months. Weak wage growth limits inflation expectations.

An interesting detail in the reports is that 31,000 net new jobs were created in manufacturing in the last month and 96,000 over three months. That’s a solid indication that manufacturing is improving.

The regional manufacturing surveys also continue to indicate that manufacturing is strong.

The Philadelphia Fed Business Outlook Survey came in at 22.3, down from 25.8, but that’s still a very positive number. This survey has been the strongest of the them all lately and is having one of the best periods in its 50-year history.

The Empire State Manufacturing Survey jumped to 22.5 from 13.1. It had declined steadily the last four months.

These surveys involve small samples of the manufacturers in a region, and that’s likely why there has been a big gap between the surveys and the data of actual economic activity.

Confidence among small business owners is soaring again, according to the Small Business Optimism Index from NFIB. The index rose to 107.6 from 106.9. That’s the second-highest level in the 45-year history of the index, bested only by 108.0 in 1983. Concerns about taxes and regulations declined. Finding qualified employees now is the biggest concern of survey respondents.

The Consumer Price Index also calmed down, declining to 0.2% from last month’s 0.5%. It rose 2.2% over 12 months. Excluding food and energy, it also rose 0.2% for the month but only 1.8% over 12 months.

Home builders still are optimistic, but a little less so than last month. The Housing Market Index from NAHB declined to 70 from 71 (which was revised down from an originally reported number of 72). The index hit a high of 74 in December. This still is a very positive number. Builders report their main problem is finding lots to build on.

New unemployment claims declined 4,000. As usual, that keeps the weekly and four-week numbers near record lows.

The Markets

The S&P 500 rose 0.92% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 0.09%. This is the third week that the Dow declined while the S&P 500 rose. The Russell 2000 rose 0.62%. The All-Country World Index rose 0.82%. Emerging market equities gained 1.64%.

Long-term treasuries rebounded 1.89% for the week. Investment-grade bonds rose 0.21%. Treasury Inflation-Protected Securities (TIPS) returned 0.27%. High-yield bonds lost 0.12%.

The dollar gained 0.17%.

Energy-based commodities lost 0.37% for the week. Broader-based commodities declined 0.65%. Gold rose 0.08%.

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