The Markets
 
Geopolitical uncertainty didn’t dent U.S. stocks last week.
 
Geopolitics is the intersection of geography, economics, and politics. Last week, there were some fine examples of the ways geopolitical events can create uncertainty. Barron’s reported:
 
“President Donald Trump began the week suggesting that a trade war with China was on hold, before later ordering his administration to explore penalties on imported automobiles. The president also canceled talks with North Korea. Italy’s bond market melted down following the emergence of a Euroskeptic government, while Turkey’s lira tumbled over concerns that President Tayyip Erdogan would take control of its central bank, raising concerns about emerging markets.”
 
Uncertainty caused major indices across Europe to finish lower last week. A majority of Asian-Pacific indices moved south, too, as did Canadian and Mexican indices. Despite pessimism elsewhere, investors in the United States remained unfazed and major U.S. stock market indices finished the week higher. The Standard & Poor’s (S&P) 500 Index was up 0.3 percent.
 
The strong performance of U.S. markets last week was remarkable because the S&P 500 moved higher on news that would seem to inspire uncertainty. It was also remarkable because U.S. stocks gained less when S&P 500 companies reported first quarter profits were better than expected.  
 
First quarter’s earnings season – when companies report how profitable they were during the first quarter – is almost over. A majority of S&P 500 companies did better than expected, according to FactSet. However, companies with stronger than expected earnings saw share prices increase 0.2 percent on average, less than share prices increased last week.
 
During the past five years, companies with higher-than-expected profits have realized share price gains of 1.1 percent.

The Market
Too much? Too little? Or just right?
 
U.S. stock markets were relatively calm, although they finished the week lower. U.S. Treasury yields hit a 7-year high and finished the week above 3 percent. While these were notable, the most remarkable events last week occurred beyond our borders. These include:
 

• The Vatican publishing a position paper on financial markets. Its opening was, “Economic and financial issues draw our attention today as never before because of the growing influence of financial markets on the material well-being of most of humankind. What is needed, on the one hand, is an appropriate regulation of the dynamics of the markets and, on the other hand, a clear ethical foundation that assures a well-being realized through the quality of human relationships rather than merely through economic mechanisms that by themselves cannot attain it.”

 

• The royal wedding boosting the British economy. A normal Britain wedding costs about £18 thousand and includes about 80 guests. Prince Harry’s nuptials were a bit more lavish. A wedding planning company estimated the cost of hosting 600 or more guests at £32 million ($43 million in U.S. dollars). The largest component of the cost was £30 million for security, which included drone destroyers.

 

• Venezuela’s oil-based economy continuing to collapse as oil prices rise. “Venezuela leads the world in two things: oil reserves and incompetence,” opined The Washington Post. Poor management of the state-run oil industry has caused production to drop 23 percent since December. The country’s declining production helped push oil prices higher last week. Prices are at levels last seen in 2014, reported Financial Times. Regardless of the country’s economic woes, this weekend’s election is not expected to oust President Nicolás Maduro.

 
Rising oil prices have pushed the cost of gas higher, but that’s not expected to deter Memorial Day travelers, according to USA Today. We wish you safe travels during the holiday weekend.

The Markets
 
Splash!
 
How do employers lure staff in a tightening labor market? The curly tail grubs and spinnies of the business world are higher wages and better benefits. 
 
During the past decade, the employment picture in the United States has shifted dramatically. In mid-2009, 15.4 million unemployed Americans were chasing 2.2 million available jobs. At the end of 2017, just 6.6 million Americans were unemployed, and employers were casting eagerly to fill 6.6 million open jobs, reports Barron’s.
 
Bloomberg offered some colorful examples:
 
“Want ads for truck drivers to haul crude oil in Texas are touting salaries as high as $150,000 a year. Some nurses are getting $25,000 signing bonuses. The U.S. unemployment rate just fell to 3.9 percent, one tick away from its lowest since the 1960s. And, on May 8, the Bureau of Labor Statistics reported there are 6.5 million unfilled jobs in the United States, the most on record. Some employers say they’re feeling the squeeze.”
 
Clearly, wages are moving higher for some types of jobs, but they’re not increasing everywhere. Last week, the Bureau of Labor Statistics reported real average hourly earnings for all employees were flat from March to April. ‘Real wages’ mean wages after inflation is subtracted.
 
The National Federation of Independent Business’ Small Business Optimism Index hit a record high in April, as small companies reported record profits. It was the 17th consecutive month of record optimism.
 
Major U.S. stock market indices moved higher last week as did many global stock market indices.

The Markets
 
What in the world?
 
A lot happened last week. Some of the notable events included:
 

• Trade talks between the United States and China. The talks were described as “frank, efficient, and constructive,” although significant issues have yet to be resolved.
• A Federal Open Market Committee meeting. The Federal Reserve indicated it expects to raise rates during 2018, but did not do so last week.
• Low unemployment in the United States. U.S. unemployment fell to 3.9 percent, which is the lowest it has been since 2000. Typically, low employment is a sign of a strong economy.
• Sky-high rates in Argentina. In an effort to shore up the nation’s currency, Argentina’s central bank “…hiked rates to 40 percent from 33.25 percent, a day after they were raised from 30.25 percent.”
• Katy Perry roasted Warren Buffett. Katy Perry revealed the ‘Left Shark’ – a backup dancer famous for being out of sync during Perry’s 2015 Super Bowl performance – was Warren Buffett.*

 
What do asset managers and researchers make of the current state of world economies and markets? A portfolio manager cited by Barron’s said, “…until proved otherwise, we remain in a long bull market, and there is an absence of indicators outside of the equity market itself (most notably in credit markets or financial conditions) to suggest this has ended.”
 
Michael Wilson, Chief U.S. Equity Strategist at Morgan Stanley has a different opinion. “Even strong earnings results haven’t been able to boost most stocks into positive territory. Why? Because rising interest rates have reached a point at which they have become a constraint on valuations.”
 
Some researchers are concerned about growth outside the United States. Alvise Marino, an FX strategist for Credit Suisse told The Wall Street Journal, “This is really a Goldilocks [U.S. employment] report…But investors are worried that global growth is not as strong as some had thought.”
 
We’re tracking events and their potential impact on markets, and we’ll keep you informed.
 
* Warren Buffet wasn’t really the Left Shark. Her comments were part of a humorous video.