More All-Time Highs
The major domestic benchmark stock indexes all moved higher last week – which included the 30th anniversary of the famous “Black Monday” crash of 1987 – to close at record levels. The driving forces seemed to be some good third-quarter earnings reports and Thursday evening’s Senate passage of next year’s federal budget, a key step on the road to tax cuts. “This resolution creates a pathway to unleash the potential of the American economy through tax reform and tax cuts, simplifying the overcomplicated tax code, providing financial relief for families across the country, and making American businesses globally competitive,” the White House said in a statement. To this point, the potential impact of an anticipated deficit growth of $1.5 trillion on account of the proposed tax cuts has not seemed to register.
The narrowly-focused Dow Jones Industrial Average advanced 164 points to 23,326, and was up 2.0 percent for the week, with a 9 percent jump by IBM on better than expected earnings driving the bus. JNJ also reported stronger than expected earnings. The Nasdaq Composite Index gained 24 points (0.35 percent), to close at 6,629. The S&P 500 was up 13 points to 2,575, up 0.9 percent for the week. Financials outperformed as higher interest rates boded well for bank lending margins. Consumer staples gave back some of their previous week’s gains, while energy stocks fell alongside oil prices late in the week as data showed an increase in U.S. inventories.
As evidenced by a steep (if temporary) decline in GE stock following its report of a drop in earnings on Friday, not all of the week’s earnings reports were greeted favorably. It also appears likely that the overall pace of earnings growth is likely to slow in the third quarter, following double-digit advances in the first half of the year. Data and analytics firm FactSet is currently anticipating earnings for the S&P 500 as a whole to have grown under 2 percent for the quarter on a year-over-year basis. Disruption from hurricanes in August and September seems to have been at least partly to blame for the slowdown, however, and investors appeared to look forward to a rebound in profits growth in 2018.
Expectations for stronger economic growth also appeared to support last week’s equity gains. Manufacturing signals remained solid in the face of the recent hurricanes, and weekly jobless claims fell to their lowest level since 1973, when the U.S. labor force was roughly 60 percent of its current size. Housing permits and starts declined more than expected in September, but existing home sales rose and surprised on the upside.
The Dow and the S&P 500 closed out their fifth straight day on Friday with all-time highs and a sixth straight weekly gain, while the Nasdaq notched its fourth straight positive week. This is the longest stretch of weekly gains for the Dow since a seven-week rally that ended in December. Last week’s positive economic data and hopes for further stimulus through tax cuts pushed U.S. Treasury yields higher.
European stocks ended last week flat to slightly lower although the German DAX index, which is heavily weighted in major multinational companies, touched an all-time high and the French CAC 40 Index surged to its highest level in five months. Japanese stocks powered higher for the week and have posted 14 consecutive daily gains, the longest stretch in 30 years. Elsewhere in Asia, China’s economy grew a robust 6.8 percent in the third quarter but Chinese stocks only closed modestly higher for the week.
In the current political climate, it can be hard to contextualize what is happening in the markets. Last week, President Trump tweeted the following: “It would be really nice if the Fake News Media would report the virtually unprecedented Stock Market growth since the election.” As Bloomberg reported last week, the stock market rally since President Trump’s election has been terrific, but it is hardly “virtually unprecedented.” The S&P 500 has gained 19 percent since the 2016 election, which is outstanding growth, but less than that of rallies after the election of John F. Kennedy in 1960 (24 percent), Franklin D. Roosevelt in 1944 (28 percent), George H.W. Bush in 1988 (31 percent), Herbert Hoover in 1928 (35 percent), Bill Clinton (again) in 1996 (38 percent), and Roosevelt (his first election) in 1932 (41 percent). Over this same 11-month time period, the rally here in the U.S. is not as strong as the world median – its progress has been less than market rallies in Germany France, Italy, Spain, and even Greece. More to the point, however, presidents have much less to do with market performance than is generally assumed. That said, there is no reason to be disappointed in market performance over the past 11 months.