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Market Recap – International Stocks Down 2.3%

Market Digest – Week Ending 5/6

A dull week for market news finished with US stocks down 0.4% and International stocks down 2.3%. Friday’s jobs report was a modestly disappointment, suggesting growth may be hard to come by but also that the Fed is less likely to raise rates at its June meeting. Ted Cruz gave up his run for President, making Donald Trump the presumptive GOP nominee.

Weekly Returns:

S&P 500: 2,057 (-0.4%)
FTSE All-World ex-US: (-2.3%)
US 10 Year Treasury Yield: 1.78% (-0.05%)
Gold: $1,289 (-0.3%)
USD/EUR: $1.140 (-0.4%)

Major Events:

• Monday – Puerto Rico said it does not intend to make most of a $422 million debt payment, raising the level of its financial crisis and forcing US Congress to find a plan to deal with it.
• Monday – Halliburton and Baker Hughes called off their merger over regulatory opposition.
• Tuesday – Met Life agreed to a $25 million fine for misleading annuity customers.
• Tuesday – Ted Cruz suspended his campaign for President, effectively making Donald Trump the GOP nominee.
• Wednesday – The ISM non-manufacturing index unexpectedly rose to 55.7, suggesting the services economy continues to grow.
• Wednesday – Tesla CEO Elon Musk said Tesla will build 500,000 vehicles by 2018, two years ahead of projections. This implies the company will have to raise more capital.
• Thursday – GoPro reported higher sales but lower earnings than expected. Shares dropped modestly and are now down over 40% for the year.
• Thursday – House Speaker Paul Ryan said he is not yet willing to back Trump.
• Friday – US employers scaled back hiring in April, potentially encouraging the Fed not to raise interest rates at its June meeting.

Our take:

Tesla reported sales of $1.6 billion and a loss of $0.57 per share. But what was interesting was Elon Musk’s statement that Tesla will build 500,000 vehicles by 2018, two years ahead of the original target. Roughly 16 million cars are sold each year in the US, so this would amount to roughly 3% of that number. Given the trajectory, that is meaningful. Potentially accelerating the trend, the push toward driverless cars is likely to be led by companies more interested in eco-friendly vehicles.

Musk tends to have big ambitions, so there is no guarantee he will hit his target, but it probably doesn’t matter. His (ambitiously named) Gigafactory 1 outside of Reno, Nevada became operational in the first quarter, though construction continues. It is expected to reduce the cost of electric vehicle batteries by 30%. This will accelerate production by other manufacturers.

Change happens faster than it used to. For the oil industry, that may not be a good thing. Oil is used for many things, but gasoline is by far the biggest demand driver. The implications are massive. Ironically, lower oil prices driven by technology improvements within the energy sector itself may be the thing that staves off execution for many years. Lower oil prices mean less incentive to switch to something new.

Oil may be with us as we know it for another 10 years, another 20, or another 50. For diversified investors, the death of an industry (or in this case almost a whole sector) need not be disastrous because there are winners and losers. However it plays out, it will be interesting.

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