Ameriprise Financial : Will the Second Quarter Provide an Inflection Point for Markets?

Stocks ended the first quarter on a strong note, as the S&P 500 rose 1.2 percent last week, putting aside for the moment concerns over the sluggish pace of global growth. After treading water for much of March and having declined in two of the previous three weeks, stocks found some support late in the week as the plunge in bond yields stabilized, bringing its gain in the year's first three months to 13.1 percent. It was the best quarter for the S&P 500 since the third quarter of 2009 when the economy was first coming out of recession.

The drop in the yield on the ten-year Treasury note from 2.75 percent at the beginning of March took it all the way down to 2.34 on an intraday basis last Wednesday. But a late week, two-day reversal arrested the slide and pushed the yield back up to 2.41 percent to end the week, eliminating the inversion with the three-month bill. That move higher in yield is being extended in early Monday trading this week, with the ten-year yield trading at 2.44 percent.

China's Manufacturing Data Surprises to the Upside

The search for evidence that the global economy is poised to stabilize in the second quarter got a big boost over the weekend with a surprisingly strong report on Chinese manufacturing activity in March. The official manufacturing PMI rose to 50.5, signaling expansion after spending the previous three months in contraction. While one data point is not conclusive of sustainable economic traction and may have been distorted by the noise surrounding the New Year celebration, it is possible evidence that the country's stimulus efforts are beginning to take hold. The services PMI was also stronger than forecast, pushing the composite index to a six-month high. Those reports were followed by the private Caixin manufacturing PMI report, which rose to its highest level in eight months. That kind of improvement can't come fast enough for export-oriented Germany, where manufacturing activity in March fell even more than expected. Stocks in Germany are up more than 1 percent in Monday trading on the news from China.

Also contributing to the better tone in China were the ongoing trade talks, which took place last week in Beijing and continue this week in Washington. Both sides insist that progress is being made and that they are aiming to have an agreement by the end of April.

One group that got a welcome lift from the stabilization in bond yields last week were the financials, banks in particular. After plunging more than 8 percent during the prior week as bond yields collapsed, bank stocks climbed 2 percent last week, leaving the group still trailing the index for the quarter with a gain of 9 percent, but feeling a lot better.

Home builders continued to be lifted by the general decline in interest rates during the quarter. That group added another 2.3 percent gain last week, bringing its surge in the quarter to 18.5 percent. Weekly mortgage applications rose almost nine percent last week, their strongest showing since the first week of the year. A strong percentage of applications to purchase was joined by a rise in applications to refinance as well, as mortgage rates fell to their lowest in over a year. That strength was reflected in a substantial rise in new home sales in February and a strong upward revision to January's total, although housing starts and pending sales remained soft.

All Eyes will be on the March Jobs Report out on Friday

Last week's U.S. economic data also included a modest downward revision to fourth quarter GDP to 2.2 from 2.3 percent, avoiding the worst fears that the quarter was even weaker than thought. The calendar also included the final consumer sentiment tally for March, which showed an unexpected rebound to its best level since last October.

If the good feeling engendered by the Chinese manufacturing data is to be extended, U.S. data this week has to do its part. Topping the list this week is Friday's jobs report. The Bloomberg consensus anticipates the creation of 175,000 new non-farm jobs, a nice rebound from the 20,000 created in February, and much closer to the 186,000 three-month average. Also watched carefully will be the wage component of the report, especially in light of market expectations of a Fed rate cut despite mild pushback on that notion by certain Fed officials. Also, on the calendar are February retail sales and durable goods orders, and March manufacturing.

With the first quarter now concluded, earnings season is fast approaching. According to Factset, earnings in the U.S. are now expected to decline in the quarter by almost 4 percent year-over-year. While the comparison to last year is a difficult hurdle to overcome, the sluggish outlook is also a reflection of the generally weak expected performance of the economy in the first quarter, which included the government shutdown, ongoing trade uncertainty, the still unresolved Brexit, and a lot of bad weather. But both the economy and earnings are expected to rebound in the second quarter, leaving full-year GDP expectations slightly above 2 percent and earnings growth expectations at 3.7 percent.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

Past performance is not a guarantee of future results.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The Chinese Flash Manufacturing PMI is based on a survey of purchasing managers in the Chinese manufacturing sector, where respondents are asked for their view of the economic and business conditions in China.

The information and opinions in this article are compiled from third party sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor.

Indexes are unmanaged and are not available for direct investment.
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