The Week In Review
Investors continued to play it safe on Friday, as they have done throughout the week, leaving the major averages little changed. The Dow (+0.1%) and the Nasdaq (-0.2%) settled on opposite sides of the S&P 500 (unch), which finished just a tick above its unchanged mark. For the week, the S&P 500 added 0.1%.
Six of the eleven sectors settled Friday's session in negative territory with the consumer staples sector (-1.0%) leading the retreat following news that Amazon (AMZN 987.71, +23.54) plans to acquire Whole Foods Market (WFM 42.68, +9.62) for $42 per share (27.0% premium) in an all-cash transaction valued at approximately $13.7 billion.
Big-box and grocery retailers like Wal-Mart (WMT 75.26, -3.65), Costco (COST 167.11, -12.95), and Kroger (KR 22.29, -2.27) were among the consumer staples sector's weakest components as AMZN's move will likely increase competition within the space. KR got hit the hardest, plunging 9.2%, while WMT and COST settled with losses of 4.6% and 7.2%, respectively.
Retailers within the consumer discretionary sector (unch), like Target (TGT 52.61, -2.85), also faced heavy selling pressure, pushing the SPDR S&P Retail ETF (XRT 39.97, -0.49) lower by 1.2%. However, the consumer discretionary group settled roughly in line with the broader market thanks, in large part, to Amazon's advance of 2.4%.
The top-weighted technology group (-0.2%) also finished in the red as Apple (AAPL 142.27, -2.02) weighed, extending its loss for the week to 4.5%. The remaining laggards--financials (-0.1%), telecom services (-0.1%), and real estate (-0.1%)--closed just a step below the benchmark index.
On the flip side, the energy sector (+1.7%) settled at the top of the day's leaderboard, by a wide margin, as crude oil bounced back from its two-day decline. The energy component climbed 0.6% to $44.74/bbl, but the advance only put a dent in the commodity's loss for the week. WTI crude finished the week lower by 2.4%.
The industrials (+0.4%), materials (+0.4%) and utilities (+0.5%) sectors registered modest gains while the influential health care group (+0.1%) finished just a tick above its unchanged mark.
In the bond market, Treasuries rallied in a curve-steepening move on Friday following a weaker than expected batch of economic data and public remarks from both Dallas Fed President Robert Kaplan (FOMC voter) and Minneapolis Fed President Neel Kashkari (FOMC voter). The 10-yr yield slipped one basis point to 2.15% while the 2-yr yield dropped three basis points to 1.33%.
Mr. Kashkari explained his second dissenting vote of this year in a blog post, writing that the Fed should wait for the current lull in inflation's upward path to end before hiking rates again and that there are others on the Committee who are sympathetic to his reasoning. Similarly, Mr. Kaplan expressed his belief that the Fed must be very cautious in raising rates further.
The U.S. Dollar Index (97.12, -0.38) finished lower by 0.4% with the greenback losing 0.5% and 0.3%, respectively, against the euro (1.1197) and the pound (1.2790). Also of note, the Eurogroup reached an agreement with Greece that will allow the disbursement of EUR8.50 billion in rescue funds to the crisis-ridden country.
Reviewing today's economic data, which included May Housing Starts and the preliminary reading of the University of Michigan Consumer Sentiment Index for June:
- Housing starts decreased to a seasonally adjusted annualized rate of 1.092 million units in May (Briefing.com consensus 1.227 million units), down from a revised 1.156 million units in April (from 1.172 million). Meanwhile, Building permits decreased to a seasonally adjusted 1.168 million in May (Briefing.com consensus 1.250 million) from a revised 1.228 million in April (from 1.229 million).
- The key takeaway from the report relates to the continued decline in single-family permits, which means supply shortages and affordability constraints are likely to persist in the new home market.
- The preliminary reading of the University of Michigan Consumer Sentiment Index for June declined to 94.5 (Briefing.com consensus 97.0) from 97.1 in May.
- Only a handful of respondents identified the James Comey congressional testimony as a factor in their outlook, meaning specific political concerns did not play a significant role in the modest dimming of the outlook.
- However, there is growing evidence that continued political bickering has taken a toll on sentiment across the political spectrum. Declines were observed across all political parties with self-identified independents reporting an 11.5-point decline in sentiment while Republicans (-9.2) and Democrats (-6.8) reported smaller declines.
On Monday, investors will receive the Current Account Balance (Briefing.com consensus -$123.4 billion) for the first quarter at 8:30 ET.
- Nasdaq Composite +14.3% YTD
- S&P 500 +8.7% YTD
- Dow Jones Industrial Average +8.2% YTD
- Russell 2000 +3.6% YTD
Week In Review: Headlines Galore, Equities Bore
This stock market was fairly flat this week, especially in the second half, as investors chewed on a host of headlines, most notably of which was the FOMC's latest rate-hike decision. The S&P 500 registered three losses and a new record high this week, eventually settling with a slim gain of 0.1%. The Dow (+0.5%) and the Nasdaq (-0.9%) settled on opposite sides of the S&P 500.
After plunging nearly 3.0% last Friday, the top-weighted technology sector registered another notable decline in the first session of the week, losing 0.8%, as mega-cap names like Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Facebook (FB) weighed. Amazon (AMZN) also underperformed, but the consumer discretionary sector, like the S&P 500, was able to escape with just a slim loss.
The tide turned in the bulls' favor on Tuesday as the aforementioned companies bounced back from their two-day declines. The technology and consumer discretionary sectors led the advance, pushing both the benchmark index and the Dow to new record highs. However, the S&P 500's gain was capped at 0.5% as investors approached Wednesday's FOMC rate decision with caution.
As expected, the FOMC voted to raise the fed funds target range by 25 basis points to 1.00%-1.25% in the midweek session. The vote was nearly unanimous with Minneapolis Fed President Neel Kashkari being the lone dissenter. In addition, the Fed laid out a specific plan for how it will start to normalize its balance sheet and revealed that the median FOMC member expects one additional rate hike in 2017.
The Treasury market held a big gain going into the decision, underpinned by weak CPI and retail sales readings for May, but gave back a portion of that advance in the aftermath. However, in the equity market, the S&P 500 hardly deviated from its unchanged mark as investors continued to digest the Fed's policy prescription into the closing bell and beyond.
Equity indices opened solidly lower on Thursday as the market continued to debate whether the Fed might be tightening policy too much and/or too fast. In addition, sentiment was dampened by a Washington Post report that claimed Special Counsel Mueller's investigation of Russia's interference in the U.S. election is broadening in scope to examine whether President Trump tried to obstruct justice.
The technology and consumer discretionary sectors showed relative weakness, yet again, on Thursday morning. However, the two groups were able to reclaim a good portion of their losses as the day went on. A positive performance from the industrial sector, which was led by names like Caterpillar (CAT), General Electric (GE), and Boeing (BA), helped keep the S&P 500's loss (-0.2%) in check.
On Friday, Amazon (AMZN) dominated the headlines after announcing that it plans to acquire Whole Foods Market (WFM) for $42 per share in cash. Big-box retailers like Wal-Mart (WMT), Costco (COST), and Target (TGT) plunged on the news, sending the consumer staples sector to the bottom of the day's leaderboard. However, the S&P 500 still managed to eke out a slim victory.
It's also worth pointing out that WTI crude settled the week with a loss of 2.4% following a bearish EIA inventory report on Wednesday, which showed a smaller than expected draw of 1.7 million barrels (consensus -2.5 million barrels) in crude stocks and a build of 2.1 million barrels in gasoline inventories for the week ended May 9. The tumble left the commodity at its worst level since early November.
Despite the Fed's call for a third rate hike in 2017, the fed funds futures market points to the March 2018 FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 50.8%, down from last week's 60.7%. The implied probability of a December rate hike sits at 43.4%, down from last week's 51.7%.