Market Pulse: April Economic Highlights

Market Pulse: April Economic Highlights

Group News posted in on 9 May 2018| comments
audience: The Boston Foundation | last updated: 9 May 2018
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Summary

What's happening: Highlights from the NP Investment Team

 

As oil prices continue their recent move higher, what are some of the potential consequences to inflation estimates, consumer income, interest rates, overall economic activity and stock prices? 

After increasing roughly 10% in all of 2017, crude oil prices have rallied more than 12% in the first four months of 2018 due to continued global economic growth, restrained supply from OPEC and rising geopolitical tension in the Middle East. While a positive development for energy-related companies and stocks (see table below), investors are beginning to incorporate a few of the downside effects. 

First, higher energy prices contribute to higher estimates for inflation. While inflation has not been a major concern over recent years, the increase in oil prices bears watching in this regard. Second, increased energy costs act as a “tax” on consumers, driving down real, after-tax disposable income. This in turn has an effect on consumer spending, the largest component of the U.S. economy. Third, as inflation expectations rise due to higher energy costs, interest rates adjust upward to compensate investors for the loss of purchasing power. Fourth, higher interest rates increase the cost of borrowing and existing debt servicing costs. Each of these factors has an effect on overall economic growth and, in turn, stock price valuation. As always, these trends bear watching. 

Leaders and Laggards:  What’s Up and Down in the U.S. Stock Market?

Economic Sectors

April 2018 
through 4/26/2018

Year-to-date 
2018 (through 4/26/18)

Energy 

10.68%

3.4%

Health Care

2.28%

0.6%

Consumer Discretionary 

2.14%

5.0%

Materials

1.66%

-4.4%

S&P 500

0.99%

-0.2%

Industrials

-1.40%

-3.4%

Consumer Staples

-4.51%

-11.9%

Equity market volatility from February and March rolled into April as markets continued to digest potential implications from trade/tariffs and the commencement of Q1 earnings announcements. Regarding the former, investor expectations for a prolonged trade war have been tempered as U.S. and Chinese leaders walk back elevated rhetoric. Simultaneously, Q1 S&P 500 earnings growth announcements have exceeded expectations with year-over-year earnings per share growth in excess of 20%, above what was the consensus level of 11% at the end of the quarter. Moderating geopolitical uncertainty coupled with solid corporate profitability have moved the S&P 500 back into positive territory for the month. 

On a sector level, leadership has been provided by Energy stocks, which have rallied in combination with oil prices, which have risen 10% since the middle of March. Consumer Staples stocks, relative outperformers in March, have trailed as earnings struggle to grow and investors rotate away from bond proxies as interest rates move higher. Over the last several years Consumer Staples, Utilities and Real Estate Investment Trust stocks have been viewed as bond substitutes given that their dividend yields exceeded many fixed income alternatives. Currently, with interest rates on short-term U.S. Treasuries near or exceeding the dividend yields of these stocks, investors are gravitating toward the risk-free alternative.

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