Tech & Tariff Influenced Volatility – Equity Update

Technology stocks led volatility in the first quarter, pulling other sectors into trading frenzies. Over 25% of the S&P 500 Index is currently comprised of technology stocks, having added volatility to the index for the first quarter. Trade war rhetoric added to volatility as U.S. companies sensitive to higher import prices on raw materials and certain finished goods experienced pullbacks.

Companies in the technology sector faltered as privacy concerns drove social media shares lower. The technology sector has also became more prone to volatility leading to gyrating valuations. In addition, news of heightened regulatory rules for technology and social media related companies escalated a sell off heading into the second quarter.

Transportation stocks are rising more closely with the rest of the market, an optimistic signal according to the century old Dow Theory.

Sources: Dow Jones, S&P, Bloomberg

World’s Largest Consumer Markets – Global Commerce

The United States by far has the single largest consumer market of any country worldwide, representing over 26% of the entire global consumer market. U.S. consumers spent over $12.5 trillion in 2017, nearly three times as much as the second largest consumer market, China. China’s consumer market is currently one of the world’s fastest growing markets, with nearly $4.5 trillion in consumer expenditures.

International companies selling to the U.S. marketplace are attracted to the enormous wealth that consumers have access to in the United States. Ample and readily accessible credit sources in the U.S. also allow consumers the ability to purchase a wide variety of products.

Emerging market economies such as India and Brazil not only have a growing consumer market, but also benefit from exports to the U.S. Whereas, developed economies such as Japan and Germany have shrinking consumer markets yet depend heavily on exports to the United States.

Demographics has been a driving force in the U.S., as baby boomers provided an enormous amount of activity among various sectors and industries for decades. Now, as baby boomers retire and exit their prime spending years, it is up to younger consumers to create and replace much of the wealth needed to maintain consumption expenditures.

Sources: World Bank Group, United Nations Statistics Division

The Significance of the Transportation Index – Historical Note

The Dow Jones Transportation Index is a historical index that dates back to 1884. It is comprised of leading bellwether transportation stocks in the trucking and delivery sector, domestic airlines, as well as companies in the railroad sector.

As a leading indicator of economic growth, these strong gains in the index are often a good sign for the U.S. economy, especially in periods when energy prices are high or increasing as well. The biggest risk to these strong gains is most likely a pullback in consumer spending activity, which would negatively affect shipping and logistics demand. Consumer confidence, manufacturing activity, and strong corporate earnings are all factors to watch to see if these gains in transportation related stocks are sustainable.

The returns of the industry components within the index are also worth watching for potential distortions that may mislead index followers. For example, the airline sector is up strongly this year, increasing approximately 34% due to strong industry profitability from recent airline mergers and restructurings as well as increased passenger traffic data. The railroads component is up nearly 10% YTD as growth in general merchandise, chemicals, and oil freight more than offset declines in coal shipments. The courier and trucking components have increased less than the index average and their contribution to the index gains have been minimal.

The Transportation index is also one of the underpinnings of the Dow Theory of stock price movements. This technical theory states that a major trend in the stock market must be confirmed by the simultaneous movement of the Dow Jones Industrial Average and, the Dow Jones Transportation Average to new highs or lows.

Source: Dow Jones

Rates Stabilized In March – Fixed Income Overview

Equity market volatility in March drove assets towards various sectors of the bond market, thus pushing yields slightly lower and various fixed income prices higher.

A key leading rate, the Libor, rose the most in 10 years. Debt reliant companies and consumers with variable rate loans tied to the Libor are most susceptible. The three month Libor rate rose to 2.31% at the end of the quarter. The six-month Treasury bill reached a yield of 1.88% in early March, an important yield because that’s exactly what the S&P 500 Index yields. Some income seeking investors may begin to view short-term bonds as an attractive alternative to dividend paying stocks prone to market volatility.

The Federal Reserve decided to raise the Fed Funds rate to a range of 1.5 – 1.75%, on track for another three rate increases this year. Language from the Fed Chief Jerome Powell shed some optimism on economic activity, noting that “the economic outlook has strengthened in recent months”, warranting further increases in the Fed Funds rate. (Sources: Federal Reserve, Bloomberg)

The 10-year US Treasury is over 3% at the time of this post (April 25), leading to equity market volatility – a routine push/pull correction process seen in late market cycles.