RECAP: Week ending May 20th, 2016
Stocks were modestly higher for the week. The tech heavy Nasdaq Composite Index outperformed its peers for the second consecutive week, while the smaller-cap benchmarks outperformed their large-cap counterparts by a lesser margin. Trading Monday began on an up note, helped by a surge in oil prices and a rally in tech stocks: Oil rose $1.52 to $47.89. Heavily weighted Apple also boosted the indexes following news that Warren Buffett’s Berkshire Hathaway had acquired a $1 billion stake in the company—a decision that was made by Buffett’s lieutenants and potential successors, The Wall Street Journal reported. Stocks gave back nearly all the gains the next day amid traders fears about a slowdown in the Chinese economy, worries that Britain might choose to leave the European Union, and political uncertainty in the U.S.
The real decline, however, began following the release of a think tank’s reports suggesting that the Federal Reserve is using a messaging offensive to brace the market for an upcoming rate hike. Indeed, the minutes from the Fed’s April policy committee meeting, released Wednesday, contained considerable discussion about a rate hike at the committee’s next meeting in June should it be merited by economic conditions. Some favorable economic data released may have been more indicative of an upcoming rate hike: Industrial production rebounded in April, rising 0.7% for the month, Auto manufacturing remained positive despite mediocre sales year-to-date, and housing starts and permits both rose at a moderate pace. Moreover, consumer prices rose at a solid pace in April, even after sharp increases in oil and energy prices were excluded. Sentiment appeared to weaken in response, as futures contracts to reflect a considerable increase in the prospects for a June rate increase.
Treasury yields rose (and bond prices declined) for the week on the generally positive economic news. Municipal bonds fell slightly, mirroring Treasuries, as historically low yields have crimped demand. The biggest muni deal news for the week was the issuance of $2.5 billion in bonds supporting the expansion of LaGuardia Airport in New York, which saw heavy demand. Investment-grade corporate bonds demonstrated resiliency as the strong technical backdrop continued. Upcoming factors include the possibility of a British exit from the European Union, a possible Fed rate hike, and continued heaviness in the issuance calendar amid seasonally low demand. High yield corporate bonds were mostly flat on the week after rallying with oil but also feeling pressure from global equity weakness.