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3rd quarter recap

Despite signs of a strengthening economy, the stock market continued on a skittish path in March, as investor confidence waned amidst uncertainty on trade issues.

The S&P 500® Index dropped 2.64% in March after a loss of 3.89% in February (the first monthly loss in 15 months). After a strong start to the year in January, the market ended the 1st quarter down 1.17%.

Four of the strongest sectors of the past year all suffered significant losses for the month. The S&P 500 Financial sector was down 4.31%, Materials fell 4.24%, Information Technology dropped 3.90%, and Health Care was down 3.07% for the month.

On the positive side, the drop in stock prices along with the strong growth of corporate earnings has helped drive stock valuations down to more reasonable levels. For more see Valuation Tug of War Fueling Volatility.

Here are some other highlights from the past month covered in more detail later in this report:

  • Retail sales sag. Retail sales continued to drop slightly through the first two months of the quarter, according to the U.S. Department of Commerce.
  • Employers beef up hiring. Employers added more than 300,000 new jobs in February, according to the U.S. Bureau of Labor Statistics.
  • Manufacturing rolling. U.S. manufacturing levels continue to increase and prices continue to rise through March, according to the Institute for Supply Management.
  • Fed hikes rate again. Despite a 0.25% increase in the fed funds rate by the Federal Reserve Board on March 21, the yield on 10-year U.S. Treasuries declined slightly in March, but still remains well above the 2017 close.
  • Oil recovers. The price of oil rebounded from a lull in February, as the price of a barrel of the benchmark West Texas Intermediate crude moved up 5.35% from its February close.
In a nutshell

What’s ahead for the economy and the markets? See the 2nd Quarter 2018 Market Outlook: Valuation Tug of War Fueling Volatility by Mark Simenstad, Chief Investment Strategist, Thrivent Asset Management.

Drilling Down

U.S. Stocks Continue Slide

The S&P 500 finished the 1st quarter at 2,640.67, down 1.17% for the year after closing 2017 at 2,673.61. It was down 2.64% for March, after closing February at 2,713.83. (The S&P 500 Index is a market-cap-weighted index that represents the average performance of a group of 500 large-capitalization stocks.)

The total return of the index (including dividends) was in negative territory for the month and the year – down 2.54% in March and 0.76% for the year.

The NASDAQ Index also continued to slide in March, down 2.87%, following a 1.87% decline in February. For the year, the NASDAQ was up 2.33%. (The NASDAQ –National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

S&P 500 Index

Retail Sales Slip

Retail trade sales dropped 0.1% in February after a 0.3% decline in January, according to the advance monthly retail sales report issued March 14 by the U.S. Department of Commerce.  However, compared to a year earlier, retail sales were up 4.2%.

Nonstore retailers (primarily online) were up 1.0% for the month and 10.1% year-over-year. Gasoline stations were up 7.9% from last year, reflecting a rise in gasoline prices, but down 1.2% for the month. Building materials were up 1.9% for the month and 4.6% year-over-year.

Auto sales and department stores were both down 0.9% for the month, but auto sales were up 2.3% year-over-year, while department stores were flat the past 12 months.

Employment Growth Picks Up

The U.S. economy added 313,000 new jobs in February, marking the 89th consecutive month of job growth, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued March 9.

The unemployment rate remained at 4.1% for the fifth consecutive month, which is the lowest unemployment level since December 2000.

The average hourly earnings for all employees on private nonfarm payrolls rose by $0.04 cents to $26.75, following a $0.07 gain in January. Over the year, average hourly earnings have increased by $0.68, or 2.6%. The civilian labor force rose by 806,000 in February, driving up the labor force participation rate by 0.3% to 63.0%.

Manufacturing Expansion Continues

Economic activity in the manufacturing sector expanded in March, and the overall economy grew for the 107th consecutive month, according to the Institute for Supply Management (ISM) Report on Business, issued April 2.

According to the report: “Export orders remained strong, supported by a weaker U.S. currency. Demand remains robust, but the nation’s employment resources and supply chains are still struggling to keep up.” Prices increased across 17 of the 18 manufacturing sectors tracked by ISM , with the ISM Manufacturing Prices Index reaching its highest level since April 2011. (The index is based on data compiled from monthly price surveys of purchasing and supply executives in over 400 industrial companies.)

Only 2 of 11 Sectors Are Up This Year

Information Technology and Consumer Discretionary were the only two sectors of the S&P 500 to show gains through the first three months of 2018 – and both sectors tanked in March. Consumer Discretionary was up 3.09% year-to-date, but down 2.33% in March. Information Technology was up 3.53% year-to-date, but down 3.9% in March.

The biggest losers so far this year are Consumer Staples, down 7.12%, and Telecom Services, down 7.48%. The only sectors with positive moves in March were Real Estate, Utilities and Energy.

The chart below shows the results for all 11 sectors:

S&P 500 Sectors

Treasury Yields Settle Down

After moving up 0.46% in the first two months of 2018, the market yield on 10-year U.S. Treasuries retreated slightly in March, dropping from the 2.87% February close to 2.74% at the close of March. The yield is still up for the year after closing 2017 at 2.41%.

As expected, the Federal Reserve Board approved a quarter-point hike in the fed funds rate at its March 21 meeting, raising the rate to a target of 1.5% to 1.75%. It was the sixth rate hike since December 2015. The Fed has indicated that there may be two or possibly three more rate hikes during 2018.

U.S. Treasury 10-Year Bond Yields

Equity Earnings Climbing

Corporate earnings projections have been robust, with consensus 12-month forward earnings estimate for the S&P 500 moving up 10.56% in the 1st quarter, from $146.86 at the end of 2017 to $161.73 at the end of March.

S&P 500 Index: Forward 12 Month Earnings Per Aggregate Share

As earnings have increased and market prices have dropped, the forward 12-month price-earnings ratio (P/E) for the S&P 500 has also dropped. It closed 2017 at 18.2 – the highest level since 2004 – and dropped to 16.36 at the close of March.

S&P 500 Index: Price/Earnings Ratio

The forward 12 months earnings yield for the S&P 500, which is the inverse of the P/E, ended the 1st quarter at 6.12%, which is well above the 5.47% yield at the end of 2017. The 12-month forward earnings yield can be helpful in comparing stock earnings yields with current bond yields. The equity earnings yield is still significantly higher than the 2.74% market rate of 10-year U.S. Treasuries.

S&P 500 Index: Earnings Yield

Dollar Declines versus Euro and Yen

After dropping versus the Euro and the Yen in 2017, the dollar has continued to weaken in 2018. The Euro was up 2.42% versus the dollar in the 1st quarter of 2018.

Euro/U.S. Dollar Exchange Rate

The dollar has dropped even further versus the Japanese Yen. The dollar was down 5.59% through the 1st quarter of 2018.

U.S. Dollar/Japanese Yen Exchange Ratio

Oil Back on Track

After a 4.77% decline in February, the price per barrel of the benchmark West Texas Intermediate crude rebounded 5.35% in March, climbing from $61.64 at the February close to $64.94 at the end of March. For the year, oil is up 7.48%.

Oil Price: West Texas Intermediate

Gold Rises

Gold prices moved up 0.71% in March. For the year, gold is up 1.37% – from $1,309.30 at the end of 2017 to $1,327.30 at the end of March.

Price of Gold

International Equities Keep Dropping

The MSCI EAFE Index, which tracks performance of developed-economy stocks in Europe, Australasia and the Far East, has been falling in sync with the U.S. market. The MSCI EAFE was down 2.24% for the month and 2.20% for the 1st quarter.

MSCI EAFE Index

What’s ahead for the economy and the markets? See the Market Outlook 2nd Quarter 2018: Valuation Tug of War Fueling Volatility by Mark Simenstad, Chief Investment Strategist, Thrivent Asset Management.

 

To see our Market Recaps every month and learn more about our perspective on the markets, subscribe to our Investing Insights newsletter.

 

Media contact: Samantha Mehrotra, 612-844-4197; samantha.mehrotra@thrivent.com

 

 

All information and representations herein are as of April 2, 2018, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product.  Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Indexes are unmanaged and do not reflect the fees and expenses associated with active management. Investments cannot be made directly into an index.

Past performance is not necessarily indicative of future results.

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