Trade Tensions Linger, But Did Goldilocks Get New Running Shoes? – Week Ended 3/9/18

Heading into March, it was beginning to feel as if the markets might revisit the correction lows plumbed in Early February amid still choppy trade. The S&P500 gave back more than -3.5% of its rebound over between February 27 and March 1 with sentiment eroding fast on the back of protectionist and trade-war rhetoric emanating from the Trump administration. That may still occur, but interestingly while the fury over trade-related tension remained elevated throughout last week and is still top of mind for many, financial markets began behaving better. In fact, the S&P500 managed to stage several mid-day reversals and close appreciably higher in 4 of the 5 days last week; the full-week experience was actually one of the best so far in 2018. The S&P500 climbed a strong +3.5% with half of that gain occurring on Friday, the 9th birthday of the current bull market (3/9) in concert with what can only be described as a blowout strong employment report for February.

The employment report, the biggest economic data point refreshed last week, showed job creation of 313k during February and upward revisions to prior months. The report was collectively well better than consensus estimates of what would have still be a strong +205k; the unemployment rate held at 4.1% (the lowest reading in 17 years) and participation rose. The real story with this headline however was that the wage growth spike which accompanied the report last month was revised lower, as some economists expected due to the distortion associated with extremely cold weather keeping some hourly and labor-intensive jobs home during the month of January causing the average to skew toward higher-paid salary professions. That lower wage-growth print is significant because inflation worries have been the dominant worry for market participants in the last month. Also favorable was the latest readings on consumer confidence and manufacturing activity. Another significant development last week was previously announced imposition of steel and aluminum tariffs do not appear as sweeping as first threatened with the exemptions for Canada and Mexico. Tariffs and a trade-war sparked by retaliation are feared because, all things equal, trade friction stimulates inflation and hurts economic growth. These exceptions support the hoped-for anticipation by some that the threats are more bark than bite and will be used as a targeted negotiation tool.

Getting strong economic data without a real risk of problematic inflation has been the favorable theme referred to as Goldilocks this bull market cycle. Last month that theme appeared near death as wage growth and a host of other price-related measures all suggested inflation was dramatically accelerating. While one data point like the employment report Friday does not fully invalidate the rising inflation narrative of the past month, it goes a good way toward easing concerns that inflation was spiking at the same time the economy might be stalling. One could say the report contained the right mix of upbeat economics signaling the economy continues to expand but that the risk of the Fed short-circuiting it via anticipated gradual normalization efforts is not yet elevated. Make no mistake, the ingredients remain for inflation to creep higher, but the runaway feared in recent weeks seems overdone and the most important inputs to a still rewarding stock market (economic growth and advancing corporate earnings) appear to remain in place.

Posted in Blog Post.