U.S. equities bounced around the unchanged line on Friday before ultimately finishing lower on concerns about a possible government shutdown on April 28 unless President Trump and Congress can agree on a new spending bill. With contentious issues including border wall construction, taxes and healthcare still in play, an easy deal seems unlikely.
This fear is being offset by ongoing “verbal intervention” from the White House about possible legislative action on tax reform and healthcare, both of which have been teased since February.
We also have a closely watched French presidential election on Sunday, which after the terror attacks in France this week, could bolster the chances of anti-establishment/anti-globalist candidate Marie Le Pen.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.3%, the Nasdaq Composite lost 0.1% and the Russell 2000 lost 0.3%. Treasury bonds were mixed, the dollar was mostly higher, gold gained 0.4% and oil extended its recent selloff down 2.2%.
Defensive utility stocks led the way with a 0.5% gain while telecoms were the laggards, down 1.6% as Verizon Communications Inc. (NYSE:VZ) was hit with a 2.4% loss following an analyst downgrade and the reporting of a first-ever decline in wireless subscribers. . Financials were also weak, down 0.9%, boosting the ProShares UltraShort Financials (ETF) (NYSEARCA:SKF) recommended to Edge subscribers by 1.3%.
Honeywell International Inc. (NYSE:HON) gained 2.7% on a first-quarter earnings and revenue beat thanks, in part, to a new accounting standard. Toymaker Mattel, Inc. (NASDAQ:MAT) fell 13.6% on a larger-than-expected Q1 earnings loss as revenues missed across all segments. Management highlighted a retail inventory overhang coming out of the holiday shopping season.
There was more poor economic data to digest, which overall resulted in the largest drop in U.S. macroeconomic data in six years as measured by the Citigroup Economic Surprise Index. Let that sink in.
Both the manufacturing and nonmanufacturing Markit PMI activity indices missed estimates, with the composite measure falling to a seven-month low. Hiring slowed as well, with April data revealing the weakest rise in private payrolls since April 2010. Profit margins are apparently under pressure as well, with input price inflation at its highest level since June 2015.
According to Chris Williamson, Chief Business Economist at IHS Markit, “The PMI data suggest the U.S. economy lost further momentum at the start of the second quarter” pointing to a Q2 GDP growth rate of just 1.1%. As a reminder, the Atlanta Fed’s Q1 GDPNow forecast stands at just 0.5%. Not exactly that rip-roaring start to 2017 Wall Street was expecting.
Heading into next week, the Q1 earnings reporting season will roll on and be accompanied by a bevy of economic data including industrial production on Tuesday and the composite PMI report on Friday. A number of Federal Reserve officials are scheduled to speak as well, including Vice Chair Stanley Fischer on Monday and again on Wednesday.
Watch for comments about the likelihood of two or more rate additional rate hikes this year as well as action to reduce the Fed’s balance sheet before the end of the year.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers. Redeem by clicking the links above.