By David Nelson, CFA
Despite fears over trade tariffs, hawkish commentary from the Fed and the usual volatility that accompanies options expiration, markets put in a flat week.
Consumer discretionary and Technology lead the pack year to date but it’s clear not all the dogs are pulling the sled. Key sectors like Financials and Industrials have lagged as the rolling correction seems to move from one sector to the next.
Trade tariffs and the potential for an all-out trade war weighs on sentiment but you wouldn’t know it from the recent economic data. The Atlanta Fed which is always on the edge came out with a 4.8% GDP projection. Even if wrong it’s clear economic activity has accelerated but begs the question, why is the market leadership so narrow?
On the industrial side the global trade proxies like Caterpillar (CAT) and Deere (DE) have stalled while the Rails including Union Pacific (UNP) and Norfolk Southern (NSC) more domestically focused have fared better.
Putting it all together, whether it’s trade fears or warning signs coming from abroad, the international dynamic seems to be weighing on large cap U.S. multinationals. With 40% off S&P revenue off shore it helps explain the small and mid-cap outperformance.
The Fed
In a well telegraphed move, the Fed hiked rates another 25 basis points. When asked about the potential for a trade war the new Fed Chair Powell said they are monitoring the situation but for the moment it isn’t showing up in the data. In addition, he announced that there would be a press conference following every meeting. Wall Street is still getting used to Mr. Powell’s style but for the moment I come away impressed. He’s plain spoken and doesn’t give us the usual Fed double speak we became accustomed to with the last 3 Fed chairs. Let’s hope he has more control of the other Fed officials than his predecessors. In recent years Fed officials have often voiced their personal views to anyone in the print and broadcast media that would give them a platform.
The downside of the meeting is despite a robust view on the economy the spread between 10 and 2-year yields fell to the lowest level in 5 years. At risk of repeating myself a flat or inverted curve doesn’t guarantee a recession, but you can bet when or if we get there every economist from Goldman to Merrill Lynch will be talking about it.
Cutting it short this week but I’ll be in the office till Thursday and then heading out to Tahoe to join Greg for meetings. Feel free to reach out with any questions.
*At the time of the article some funds managed by David Nelson were long SPY, CAT, DE, UNP & NSC
