Caution Wins the Week

In a shortened holiday week (markets were closed on Friday in observance of Good Friday), the theme seemed to be “caution.” Light trading volumes, comments from President Trump, and a risk-off mentality combined to help push global equities lower, drive down bond yields, push up oil prices, and weaken the US dollar. On a brighter note, we hope you had a wonderful Easter weekend!

Now back to the details - on the equity front, concerns over geopolitical tensions in North Korea, Russia, and Syria were coupled with light market trading ahead of the long-weekend. The S&P 500 fell 1.1%, and the Eurostoxx 600 Index, the FTSE 100 Index, and the TOPIX Index also traded down for the week. Cyclical sectors like financials and industrials took the bigger hit, while safe-haven assets like gold were beneficiaries of investor concerns. Amid this caution, the VIX – a measure of expected volatility – reached a 5-month high closing at 16.

In addition to those comments on interest rates, Trump also opined on his belief that the US Dollar is excessively strong at its current level and remarked that the Treasury would not brand China as a currency manipulator. Partially in light of these comments, the US Dollar Index fell 0.5%, weakening relative to currencies broadly. The Japanese Yen and British Pound in particular gained 1.9% and 1.1%, respectively, on the back of US geopolitical tensions. While the Yen sits at its strongest levels since November, it remains weaker than 2016’s highs.

Trump’s comments on the USD also served to help drive up gold prices, which were already being aided by the aforementioned “risk-off” sentiment.

On top of all of this, a continued divergence between the “hard” and “soft” economic data has many investors concerned. Hard data is the more objective side of things (e.g. Consumer Price Index), while soft data reflects the more subjective side of the discussion (e.g. consumer sentiment). It’s like with that “last ski run for the day” where the mind is telling you YES, yet the body is telling you an emphatic NO. Just as that last ski run often lands you at the orthopedic surgeon, investors are concerned this divergence is going to lead the markets where they do not want to go. As such, investors prefer when these data sets are moving in sync (and upwards).

We continue to monitor these movements, including the Q1 earnings reports that kicked off last week. A number of the largest banks got reporting season started on Thursday, and a number of well-known names will continue the parade this week. Analysts continue to expect strong earnings growth (19.9%, or 12.5% ex-energy, according to JP Morgan), though we caution that analyst expectations tend to overshoot at the start of each reporting season. Strong growth is important, as fundamentals will likely be the key driver for stocks as investors continue to push out the timing on pro-growth reform from the new administration and Congress.

Lastly, a quick reminder that tomorrow (April 18) is Tax Day for this year. Please contact us right away if you still desire to make an IRA contribution for 2016. The contribution must be in your account by tomorrow!