As the second quarter of 2018 begins, the markets are keeping an eye on a possible trade war. Meanwhile, fresh readings on jobs, auto sales and construction spending lie ahead.
(Monday Market Open) The somewhat disappointing Q1 is officially over, and today marks the start of Q2 trading. Both the S&P 500 (SPX) and Dow Jones Industrial Average ($DJI) lost ground in Q1 for the first time since mid-2015 amid tariff fears and concerns about info tech, but Friday delivered a positive coda with solid gains across most sectors.
The new quarter begins with stocks in the red, with all of the major indices softer in pre-market trading on an announcement from China that it's slapping about $3 billion worth of tariffs on U.S. products including steel pipes, meat, nuts and wine. This is in response to the recent move from the White House two weeks ago to levy tariffs on aluminum and steel. Markets dislike uncertainty, and the potential for an all-out trade war certainly qualifies as uncertainty.
Thus begins Q2 2018. With the full quarter stretching ahead and offering a fresh slate, long-term investors might want to monitor some of the following trends:
Putting aside the long-term view and looking at the week ahead, data are front and center with earnings season still a couple weeks away. Friday’s March jobs report, and to a lesser extent today's construction spending and tomorrow's auto and truck sales and numbers, could give investors a better sense of the economic landscape.
If you think back a few weeks, the February jobs report could hardly have been scripted any better. The U.S. economy added 313,000 jobs and wages climbed just 2.6% year over year. The mystery remains how wages can climb so slowly when employment keeps gaining at this frenetic pace. Though the mystery remains unsolved for now, the fact is jobs growth has been sparking over the last few months and that tends to put a positive spin on the outlook.
One thing to consider, however, is that with unemployment near 20-year lows, the monthly job numbers may not be able to keep up the 242,000-a-month average they’ve posted between December and February. Don’t be surprised if there’s a pullback in the headline number, but also keep in mind that any figure above around 100,000 is probably enough to keep up with population growth.
The wage growth number also comes under a microscope. The February pullback to 2.6% from January’s 2.9% came as a relief to those worried about possible inflation, but one month isn’t a trend. If the number starts ticking up again, inflation fears might resurface. Later this week, we’ll look at Wall Street’s estimates.
FIGURE 1: CRUDE CREEPS HIGHER.
Crude oil spent the bulk of Q1 in the low-to mid-$60s, but has been inching higher in recent sessions. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results
Blurring the Lines? In a year that’s already seen Amazon (AMZN) team up with JP Morgan (JPM) and Berkshire Hathaway (BRK.A) on plans to help reduce health costs, Wal-Mart (WMT) also seems ready to enter the medical fray. The Wall Street Journal reported that WMT is in preliminary discussions to buy health insurer Humana (HUM). While there’s no guarantee they’ll agree on a merger or pursue some other partnership, the reported discussions, if confirmed, hint at a blurring of lines in which major companies like WMT feel the need to move out of their core competencies.
This has been especially prevalent in retail, where the entire industry is under pressure to boost profits amid competition from AMZN and other online retailers. As the WSJ reported, WMT’s revenue eclipsed $500 billion in its latest fiscal year—more than Apple (AAPL) and Exxon Mobil (XOM) combined. But WMT’s profits have declined 30% over three years to $10.5 billion, squeezed by competition and e-commerce investments to fend off AMZN. It’s way too early to predict where this might go, but it’s a retail trend worth monitoring.
Millennials Not Saving: Here’s an alarming fact to start the quarter: The National Institute on Retirement Security reports that 66% of people between ages 21 and 32 have nothing saved for retirement. The report also found that even though two-thirds of Millennials work for an employer that offers a retirement plan, only slightly more than one-third (34.3%) of Millennials participate in their employer’s plan. That’s a little troubling. It’s never too soon to start saving for retirement, and if your employer offers you a plan, it’s folly not to participate. Even putting a little aside now can mean a lot later when you think about the power of compounding. When you’re 25, being 50 is outside of most people’s thought process, but one of the greatest investments you can make for yourself is to start putting money away at that age. It should be an investment in the future of you.
Unsmoothed. Most economic indicators released by the government are in some way smoothed—to remove potentially volatile elements that might give a false reading. Employment figures are seasonally adjusted. Inflation numbers are sometimes reported minus food and energy—two historically volatile segments, and so forth. By contrast, the Federal Reserve Bank of Atlanta has begun publishing a running estimate of real gross domestic product (GDP) based on the most recent data, often within hours of the release of a data point in which it tracks. This GDPNow forecasting model is based solely on the math, with no smoothing or other subjective adjustments.
GDPNow was quite volatile in Q1. In early February, the metric registered a 5.4% annualized GDP growth for 2018. Since then, muted readings on inflation, retail sales and home sales, GDPNow fell to 1.8%. But after last week's data points were added in, it's up to 2.4% — still below 2017's 2.9% growth, but more in line with growth over the last few years.
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FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.
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