Economic Market/Portfolio Happenings
Hello and welcome to this week’s Jones Financial Blog! Our goal at Jones & Associates is to help keep you up to date with interesting current economic/market happenings as well as some proprietary portfolio happenings. Knowledge is power and thought we would share some of ours with you. Enjoy!
All data is for the week ended May 3, 2018:
Stock markets were generally higher around the globe, with the S&P up 0.22%, NASDAQ gaining 0.23%, Russell 2000 advancing 1.42%, international developed markets (MSCI EAFE) up 0.33% and emerging markets (MSCI EM gaining 0.48%. Positive employment news coupled with statements from the Federal Reserve were positive drivers of the markets. Within the US, financials and health care were the best performing sectors while energy was the poorest performer1 as oil prices slid another 3.3% last week (2).
The Federal Reserve chair cast doubt on the prospects for any near-term interest rate reductions with his upbeat economic opinion, noting that both economic growth and employment came in above expectations while inflation surprised to the downside. Inflation has become a recent focus for those trying to justify a rate cut. The Fed chair stated that lower inflation appears due to transitory factors, and the Fed expects inflation to return towards the 2% target. Exercising one of its tools, the Fed is reducing the rate of interest paid on excess reserves to 2.35% from 2.40% to manage rates with large excess commercial bank reserves in the system. (3) The benchmark 10-year treasuries now yield 2.54%, up 3 basis points for the week and down 15 basis points year to date. (1)
In response to the Fed chair’s confidence for manageable growth and inflation, the dollar appreciated versus a basket of other currencies. This appreciation in the dollar drove down the price of gold since it is priced in US dollars, making it more expensive to overseas buyers.
The U.S. created 263,000 jobs in April - well ahead of 200,000 consensus estimates - and the unemployment rate fell to a nearly 5-year low of 3.6%. Average wages rose 3.2% year over year. (1)
Consumer spending surged in March, adding to the sense the economy is on firm ground, while core inflation weakened. Spending jumped 0.9% in March after a 0.1% gain in February. This was the largest monthly gain in almost ten years. The closely followed core inflation was flat in March, pushing the yearly rate down to 1.6% from 1.7%. This is the lowest rate in 20 months. Personal incomes, meanwhile, increased 0.1% in March and remained on a moderate growth path. (4)
Pending home sales (signed contracts, not closings) in March rose 3.8% vs. February but 1.2% below March year ago. On a year over year basis, the purchase index of mortgage applications rose 1%. The month over month gain can be attributed to a drop in mortgage interest rates. Mortgage rates for the 30-year fixed rate declined 4 basis points from the prior week to 4.42% while the rate on a 15-year mortgage dropped 6 basis points to 3.81%. (5)
Proprietary portfolio happenings:
Apple Inc. (APPL), a G50 and Core Select holding, reported quarterly revenues and earnings that exceeded consensus expectations; commentary around improving iPhone trends in recent weeks was encouraging. (6) However structural headwinds in China remain, and the shares have appreciated significantly since the start of the year (up 2% last week). We are currently reviewing our positions.
Cognizant Technology Solutions (CTSH), a Core Select holding, reported disappointing revenue and earnings guidance for the full year due to new headwinds in their health care clients (about 28% of total quarterly revenues). (7) Investors were unimpressed with the new CEO, and shares were down 10% for the week. We are currently reviewing our positions.
EOG Resources (EOG) an Energy Sector Focus holding, reported revenues and earnings that were well ahead of expectations. The board also raised its quarterly dividend by 31%, having raised it by 72% over the past 14 months.
Leidos Holdings Inc. (LDOS), a G50 holding, reported revenues and earnings that exceeded expectations. It also raised guidance for annual earnings and operating cash flow. Shares rose 10% for the week and are up 39% year to date.
Paychex Inc. (PAYX), a G50 holding, increased their dividend by 11%. This follows a 12% dividend hike announced a year ago. Current yield on the new rate is 3.71%.
Did You Know...At 26 million people, the city of Shanghai has a population larger than the continent of Australia. Likewise, Texas has a larger population than Australia.
Sources: (1) JP Morgan Weekly Market Recap 5/6/19, (2) Oilprice.com, (3) YouTube 5/1/19, (4) Bureau of Economic Analysis 4/29/19, (5) Mortgage Bankers Association, (6) Apple Inc. press release 4/30/19, (7) Cognizant Technology Solutions Corp. press release 5/2/19, (8) EOG Resources 5/2/19, (9) Leidos Holdings Inc. press release 4/30/19, (10) Paychex Inc. press release 5/3/19