Stocks surged higher for the consecutive week as Tuesday evening the Trump Administration agreed to a fourteen-day ceasefire with Iran. Although this ceasefire remains tenuous at best as military activity continued and the Strait of Hormuz remains basically closed. That said, hopes remain that the United States and Iran can come to a deal that will end this conflict as talks were scheduled to begin yesterday. We think that should this be successful, a bounce to the top end of the trading range is likely, but further gains over the short-term in the broader market will be harder to come by. As we have noted in the past, mid-term election years tend to be challenging, especially during the second and third quarters, before giving way to a year-end rally and positive third year. We think this year may play out according with this historical tendency.
· Two data points below illustrate the impact of the war on inflation. The first is the Consumer Price Index (CPI) which rose 0.9% during March and has advanced 3.3% y/y and the second being the Personal Consumption Expenditures Price Index which rose 0.4% during February. Note that the latter was calculated prior to the start of the conflict.
· The ceasefire in the middle east put downward pressure on the U.S. dollar as investors, who had been investing in the greenback as a safe haven, sold. Although the decline is most likely temporary, longer-term weakness adds to inflationary pressures as it makes imports more expensive. On the flip side, exports become cheaper adding to the competitiveness of U.S. multinationals. The bottom line is that President Trump may declare victory in Iran. However, it may be that how other countries perceive the end to the war may be what counts. Time will tell.
· First quarter earnings season is about to kick off and companies are generally expected to post solid results. According to analysts estimate year-over-year earnings growth for the S&P 500 is expected to grow by 12.6% while revenue growth is expected to increase by 9.9%, which would be the highest growth rate since late 2022. This should help provide a floor for stocks.
Economic Data That Drove Market Sentiment This Past Week…
· Inflation at the Retail Level as measured by the Consumer Price Index rose 0.9% during March (3.3% y/y), after rising 0 3% during February. The CPI has fallen from a y/y high of 9.1% during June 2022 but remains stubbornly elevated relative to the Fed’s 2.0% target. Energy prices spiked 10.9% during March (12.5% y/y) after rising 0.6% in January. Food at home prices fell 0.2% (1.9% y/y) during March after rising 0.4% in February. The cost of shelter rose 0.3% during March (3.0% y/y), after rising 0.2% during February. Excluding food and energy, the core CPI rose 0.2%, after rising by 0.2% during February. Over the past year the core CPI has risen 2.6%, well below the September 2022 peak of 6.6%. (Source, U.S. Bureau of Labor Statistics)
· The University of Michigan reported that its Preliminary April Reading of Consumer Sentiment fell to an all-time low of 47.6 (-10.7% y/y) from a final March level of 53.3 and from a preliminary March 55.5. The preliminary April expectations component slumped to 46.1 (-10.8% y/y) from a final March 51.7 and from mid-March 54.1. Lastly, the preliminary April current conditions component slid to 50.1 (-10.2% y/y) from a final March 55.8 and from mid-March 57.8. According to the Survey of Consumers Director, Joanne Hsu, “demographic groups across age, income and political party all posted setbacks in sentiment, as did every component of the index, reflecting the widespread nature of this month’s fall.” (Source, Univ of Michigan)
· Fourth Quarter Gross Domestic Product (second revision), as reported by the Commerce Department, a tally of the output of all goods and services in the United States, rose at a revised annualized rate of 0.5% (2.1% y/y), from an initially revised 0.7% and from 4.4% recorded during Q3. Real Final Sales to Domestic Purchasers rose at a revised 1.8%, down from an initial revision of 1.9% and below the pace of 2.8% during the prior quarter. Government Spending (Government Consumption Expenditures and Gross Investment), as a result of the government shutdown, fell 16.6% during Q4, a slight improvement from the first revision of a 16.7% drop. The GDP Chain Price Index rose at an annual rate of 3.7% (SAAR), revised down by 0.1%, after rising 3.8% during Q3. The PCE Price Index rose at an unrevised annual rate of 2.9% after climbing 2.8% during Q3. The PCE Price Index Excluding Food and Energy rose at an unrevised SAAR of 2.7% during Q4, a slight improvement from 2.9% during the prior quarter. (Source, U.S. Bureau of Economic Analysis)
· The Bureau of Economic Analysis reported that Personal Income decreased by 0.1% during February. This decline was primarily a result of a decline in dividend income as well as government transfer payments. Disposable Personal Income also declined by 0.1% when adjusted for inflation. Consumer spending, or Personal Consumption Expenditures rose 0.5%. However, when adjusting for inflation, real consumer spending edged up by only 0.1%. Inflation remains a key factor, as the PCE Price Index rose 0.4% for the month and 2.8 percent year-over-year. The core index, which excludes volatile food and energy costs, also showed a 0.4% from the previous month and by 3.0% y/y. Amidst these shifts, the Personal Saving Rate slipped to 4.0% of disposable income, down from 4.5% in January.
· The Institute for Supply Management’s composite index of non-manufacturing (service) sector activity dropped to 54.0% during March from 56.1% in February, the twenty-first consecutive month of expansion. Of note were New Orders (60.6% v 58.6%), Employment (45.2% v 51.8%), Backlog of Orders (53.6% v 55.9%) and Business Activity (53.9% v. 59.9%). The Prices Paid Component jumped to 70.7% during March from 63.0% during February. (Source, Institute for Supply Management)
Economic Reports scheduled to be released this week, include the following – on Monday, March Existing Home Sales; on Tuesday, March Wholesale Price Inflation as measured by the Producer Price Index; on Wednesday, March U.S. Import and Export Price Data; on Thursday, March Industrial Production, March Capacity Utilization and Initial Claims for Unemployment Benefits.
Several potentially market moving companies are scheduled to report earnings, to include Goldman Sachs (GS), Wells Fargo (WFC), Citigroup (C), BlackRock (BLK), JP Morgan Chase (JPM), Johnson & Johnson (JNJ), ASML Holding (ASM), Morgan Stanley (MS), Bank of America (BAC), Progressive (PGR), PNC Financial (PNC), US Bancorp (USB), Bank of NY Mellon (BK), PepsiCo (PEP), Abbott Laboratories (ABT), Charles Schwab (SCHW), Taiwan Semiconductor (TSM) and Netflix (NFLX).