US equities closed out Q1 on a positive note on Friday with the Nasdaq posting a quarterly gain of 16.5%. Quarter-end window dressing helped lift all major equity market indices last week – effectively stalling my call for additional weakness in equity prices following the previous week’s reset lower.
Fears fueled by the recent inversion of the three-month Treasury yield over the 10-year were at least temporarily allayed on Friday as the inversion reversed. The combination of quarter-end window dressing and a reversal of the yield curve helped lift equities prices. Despite last week’s welcome and constructive performance by US equities, markets remain under pressure due to the accumulation of distribution days registered in recent weeks (S&P 500 – 7, Nasdaq – 6).
Leadership on the Nasdaq was largely semiconductor-centric on Friday with Micron Technology (MU), Applied Materials (AMAT) and Microchip Technology all lifting the Philadelphia Semiconductor Index 1.6% on the session.
For the week, all majors gained marginal ground due in part to a reversal that materialized on Wednesday. After slipping roughly 1.1% in the early going on Wednesday, equity markets pivoted higher due to the leadership provided by the all-important homebuilding sector. Though both the S&P 500 and Nasdaq still managed to lose modest ground on the session on Wednesday, that intraday reversal set equity markets up for a positive close to the week with the help of the aforementioned window-dressing and the reversal of the yield curve on Friday.
Does last week’s modest reversal have legs? Equity markets remain under pressure as we head into this weeks trading.
Much of the directional cue we receive in terms of our near-term trade rests with the economic data due for release this week due to the fact that Q1 earnings season does not officially get underway until next week. In fact, on Friday of next week (April, 12), we hear from JP Morgan Chase (JPM), PNC Financial (PNC) and Wells Fargo & Company (WFC). Until then, equity market direction will be largely dependent on Treasury yield curve behavior, economic data and geopolitical headlines.
This week’s economic calendar highlights begin this morning with US retail sales for February. Econoday consensus is 0.3% versus January’s 0.2%. Less-autos M/M for February, retail sales are expected to drop from January’s +0.9% gain to +0.4%. The ISM Mfg. Index for March is also out today. Econoday consensus is 54.2 – matching February’s results. Durable Goods Orders for February are out Tuesday. The M/M change is expected to reflect modest contraction (-1.8%) versus January’s 0.4% gain. The EIA Petroleum Status Report for the week ending 3/29 is due out Wednesday. Last week’s report was mixed with crude inventories rising by 2.8M bbl, while gasoline (-2.9M bbl) and distillates (-2.1M bbl) saw draws. Weekly Jobless Claims are expected to come in at 216K for the last week of March.
Without question, the most closely watched economic data point scheduled for release this week is the March Employment Report. Econoday nonfarm payroll consensus is +170K with the unemployment rate remaining at a cycle low 3.8%. Private payrolls are expected to expand by 168K, manufacturing is expected is grow by 10K and average hourly earnings are expected to have grown by 0.2% for the month.
Equity markets still have something to prove if there is to be any meaningful move higher from here in Q2 after a stellar Q1. Our current uptrend is under pressure due to the price weakness that framed much of March. Additionally, as we have discussed, earnings season doesn’t get underway in real terms until the Friday of next week, and in that event, this Q1 earnings season is expected to reflect compressed Y/Y earnings comparisons–some refer to it as an “earnings recession”. Equity markets were provided a bit of reprieve last week with the yield curve reversal. Will that hold? If it doesn’t, look for that to be reflected in lower equity prices this week.
As bullish as I was when we hit a 52-week bottom on December 24, 2018, my outlook has now grown cautious over the near term.
Another factor that could well act as a headwind for equity prices at the outset of Q2 is the fact that we have entered into a quiet period for share buybacks. Companies rarely initiate share buybacks in the weeks leading up to corporate results. In fact, according to Goldman Sachs, “Half of the S&P 500 is in a so-called blackout period this week, and that figure is estimated to rise to 78% next week and 86% the week of April 8.”
Flickr photo: bfishadow