Party On

Domestic stocks continued their winning streak in the new year, with the major indexes all notching their fourth consecutive weekly gain and moving to new record highs. The large-cap indexes performed much better than the mid- and small-cap benchmarks, however. Within the S&P 500, health care (lifted by some early-week biotechnology mergers) and consumer discretionary stocks led the gains, while energy, utilities, and consumer staples stocks lagged.

Markets got off to a strong start on Monday, thanks, in part, to a stopgap spending bill passed by Congress to fund the federal government for another three weeks following the shutdown over the weekend. That seeming relief rally was a bit unexpected given that stocks had not sacrificed much as the shutdown had loomed. Traders noted that Monday also brought word of a total of $26 billion in announced and confirmed mergers and acquisitions, which may have also supported the gains.

The focus soon returned to fourth-quarter earnings, with companies composing nearly one-fifth of the S&P 500’s market capitalization reporting results last week. Netflix surged around 10 percent on Tuesday after reporting subscriber growth that beat analysts’ expectations. Johnson & Johnson, the fourth-largest component in the Dow by market cap, also exceeded revenue expectations. Airlines announced generally good results during the week, but news of coming capacity increases at United Continental and Alaska Airlines raised fears of heightened fare competition and weighed on the group. As of Friday, research firm FactSet had revised its previous week’s estimates and was expecting earnings for the S&P 500 as a whole to have increased by 12.0 percent in the fourth quarter (on a year-over-year basis).

The week’s most notable market action may have taken place in the U.S. Treasury and currency markets. On Monday, positive economic news and the end to the government shutdown helped push the yield on the benchmark 10-year U.S. Treasury note to over 2.66 percent, its highest level in nearly four years. American economic growth is proving solid and broad, but a warning signal may be flashing under the surface: personal savings as a share of disposable income is falling rapidly. Overall, economic growth (GDP) climbed by 2.6 percent on a quarterly basis at the end of 2018, data released Friday showed. That was below not only consensus analyst estimates, but also below both Q3 (3.2 percent) and Q4 16 (3 percent), but it is still a strong rate to finish off the year. The expansion was driven in large part by personal consumption, which picked up substantially in the fourth quarter – a move that came as the savings rate slumped to 2.6 percent as a share of disposable income, its third-lowest on record. In Q4, consumer spending was up 3.6 percent, business fixed investment was up 6.8 percent and residential investment was up 11.6 percent.

Yields fell back a bit on Tuesday but then hit a new multiyear high on Wednesday after the U.S. dollar hit a three-year low (a falling dollar makes holding Treasuries and other U.S. assets less attractive to foreign investors). The dollar’s drop followed comments from U.S. Treasury Secretary Steven Mnuchin, who said that a weaker dollar was good for the U.S. in terms of export opportunities. Mnuchin later qualified his comments, and the dollar rose and bond yields fell back on Thursday after President Trump voiced support for a strong dollar at the World Economic Forum in Davos, Switzerland.

President Trump made his America-first pitch in Davos on Friday, touting the strength of the U.S. economy, telling the other world powers: “There has never been a better time to hire, to build, to invest and to grow in the United States.” The President sought to use the speech to reaffirm America as the leader of the global economy, but kept with his administration’s motto in assuring the other countries that “America First does not mean America alone.” However, to this point at least, this economic strength has not unleashed a wave of global demand for U.S. dollar assets. In fact, the dollar weakened as prospects for the tax cut – and associated rise in the U.S. federal budget deficit to over 5 percent of U.S. GDP – increased. And it has depreciated further this year. The most likely explanation is that the entire global economy is on fire.

European stocks were mixed last week as traders there seemed more focused on currency news than stock-specific reports. After the U.S. Treasury Secretary’s weak-dollar comments, the euro rose to a three-year high versus the greenback and finished the week at about $1.24. The UK’s FTSE 100 and Germany’s DAX 30 both lost ground for the week. Asian stocks were also mixed as Chinese shares rose sharply while Japanese stocks fell.

[ctct form=”269″]

Modestly Higher

The major domestic stock market indexes closed last week modestly higher. After the Monday holiday, equities jumped higher on Tuesday as the S&P 500 saw its best one-day advance since November to close at another record high. Consumer staples led the way and large caps led small caps. Stocks mostly drifted lower for the rest of the week.

Earnings reports were the week’s primary market driver. By week’s end, FactSet was calling for an earnings decline of 0.2 percent for the S&P 500. As recently as last week, FactSet was calling for a 10 percent gain. However, concerns over the possibility of a government shutdown, realized late Friday evening, also muted any optimism and limited gains.

U.S. Treasury paper suffered a down week as U.S. assets were not particularly desirable from a global perspective due to the increasing likelihood of a forced government shutdown. By comparison, foreign assets were desirable, and European stocks had a good week, tempered somewhat by currency strength from the euro. Asian stocks had a similarly good week.

[ctct form=”269″]

Still Partying Like It’s 2017

Stocks recorded a second week of solid gains and record highs to open 2018, as traders digested the first fourth-quarter earnings reports and celebrated some strong economic data. All the major indexes closed the week at record high levels. The S&P 500 recorded its first daily decline of 2018 on Wednesday, marking the end of the index’s best start to the year since 1987, before bouncing back. Trading activity picked up late in the week, and consumer discretionary, energy, financials, health care, and industrials all recorded solid gains. Real estate and utilities stocks underperformed for the week as long-term U.S. Treasury bond yields rose, making their ample dividend payments less attractive in comparison.

China played a surprisingly large role in U.S. investor sentiment last week. Stock futures fell sharply before the start of trading on Wednesday on reports that China was considering slowing or even halting its purchases of U.S. Treasury paper. The news pushed the yield on the benchmark 10-year U.S. Treasury note to 2.60 percent, its highest level in 10 months, and led to fears of a disruption in global financial markets. Stocks quickly regained their footing, however, and Chinese officials later denied any changes to their policy. Observers soon noted that China has not been an important buyer of U.S. Treasuries in recent years. Traders were also briefly unnerved Wednesday by an article published by Reuters that stated that Canadian officials are increasingly convinced that President Trump will soon announce a U.S. withdrawal from the North American Free Trade Agreement. The White House denied the report, however.

Traders seemed to turn their attention away from Washington, D.C. and toward economic data and earnings later in the week. Stocks shot higher in early trading Friday, following the release of data showing that retail sales had risen by a solid 0.4 percent in December. The gains came on the back of a 0.9 percent gain in November. Shares of Amazon.com and traditional “big box” retailers Home Depot, Best Buy, Costco, and Walmart all rose on the data.

The Commerce Department’s retail figures are not adjusted for inflation, however, and Friday also brought news that core prices (excluding food and energy) had risen by 0.3 percent in December, more than widely expected, driven by steep increases in prices for new and used vehicles. Underlying inflation trends seem to be rising, which should keep the Fed on track to continue raising interest rates in 2018.

Friday also brought the release of the first major fourth-quarter earnings reports. Traders seemed to welcome a positive outlook from JPMorgan Chase, while Wells Fargo fell on news that it had set aside $3.25 billion in reserves to cover legal expenses related to its mortgage practices leading up the housing collapse and 2008 financial crisis. As of the end of the week, Thomson Reuters I/B/E/S was expecting fourth-quarter earnings for the S&P 500, as a whole, to increase 12.1 percent versus the prior year. Data and analytics firm FactSet was a bit less optimistic, expecting a rise of a still strong 10.5 percent.

European equities had another good week too amid generally positive economic and geopolitical news despite being held back a bit by a stronger euro. Early in the week, the Europe STOXX 600 Index touched its highest point since August 2015 with the automobiles, commodities, and financials sectors all rising. The FTSE 100 Index of UK blue chip stocks notched three successive record-breaking days as the pound’s weakness and stronger-than-expected manufacturing and industrial output reports boosted stocks.

Most of Asia traded higher last week, although the major Japanese stock market benchmarks fell modestly. The World Bank released its semiannual Global Economic Prospects report last week and bank forecast that Japan’s economy will grow 1.3 percent in 2018, down from 1.7 percent in 2017 but still positive. Meanwhile, China’s foreign exchange reserves rose to their highest level in over a year and exports rose more than expected in December, the latest data underscoring the country’s economic strength during a year that is widely expected to yield to slower growth.

[ctct form=”269″]

Party Like It’s 2017

Markets opened after the New Year’s holiday and immediately began to party like it was 2017, when domestic stocks had a great year and foreign stocks had an even better year. All of the major domestic stock indexes raced to multiple new all-time highs last week. The Dow Jones Industrial Average, although narrowly focused, garnered the most attention by passing the 25,000 threshold on Thursday – less than a year after breaking through 20,000 for the first time. Less noticed but perhaps more telling was a new record low on Wednesday for the CBOE Volatility Index (the VIX), Wall Street’s so-called “fear index.” Energy stocks were particularly strong, helped by a climb in domestic oil prices to their best levels in three years. Information technology and materials shares also performed especially well. Utilities and real estate stocks were weak, held back by a sharp rise in long-term bond yields, which makes their dividend yields less attractive in comparison.

Traders suggested that strong economic signals, both in the U.S. and abroad, appeared to support the market last week. Two closely watched surveys of U.S. manufacturing activity rose in December and came in better than expected. Growth in construction spending declined a bit for the month but also beat expectations. December auto sales surprised on the upside, even as the industry recorded its first annual sales decline since the financial crisis. However, the year-end numbers saw an increase in sales of pickups, which automakers typically sell at higher profit margins.

As usual, traders paid particularly close attention to the monthly jobs data released on Friday. A strong report on monthly private-sector payroll gains from payroll processor ADP on Thursday appeared to send shares higher in early trading. However, Friday’s official jobs report from the Bureau of Labor Statistics showed employers adding only 148,000 jobs in December – many fewer than in November, and a larger decline than expected. Still, equity prices rose on Friday as they have on every day of 2018 thus far. For the S&P and the Nasdaq, it was the fourth straight closing record, while the Dow carved out its third in a row.

The biggest news in the bond market was Wednesday’s release of minutes from the Federal Reserve’s December 12-13 policy meeting, which seemed to reassure both traders of both bonds and stocks. The minutes revealed that views on rate policy were not unanimous, as the two dissenters from the vote to raise rates were concerned that the hike could slow economic growth and further impede an acceleration of inflation. Additional developments, such as the flattening of the U.S. Treasury yield curve and the economic impact of the tax bill signed into law in December, were also points of consideration during the discussion. The release of the minutes appeared to put a cap on the yield of the benchmark 10-year U.S. Treasury note, which had spiked the previous day.

European equity markets began 2018 on a subdued note, but momentum from strong regional and global economic data helped to fuel a rally there too by the end of the week. The blue chip FTSE 100 hit yet another record high, while the STOXX Europe 600, Germany’s DAX, and other key indexes also ended the week higher. Some of the key drivers included automobile makers, buoyed by better-than-expected sales, and banks, which benefited from higher yields and steeper yield curves. Earlier in the week, tech and retail stocks drove market gains amid favorable reports of increased sales and demand. Traders were encouraged that German retail sales were strong in November, but a report that UK retail prices fell in December signaled that consumers were less willing to spend, weighing on the market.

On Thursday, the first Japanese trading day of 2018, following an extended (five-day) stock market holiday break, equities there rallied 3.3 percent and subsequently climbed on Friday, setting a fresh 26-year high. In just a two-day trading week, the Nikkei 225 Stock Average advanced 4.2 percent. In China, stocks also rallied strongly as a trio of Chinese manufacturing indicators for December signaled that the country’s economic activity stayed strong as 2017 ended.

[ctct form=”269″]

Mostly Higher (Again)

Most of the major domestic benchmarks recorded modest gains last week, bringing the large-cap benchmarks and the tech-heavy Nasdaq to new all-time highs. The smaller-cap benchmarks lagged and remained a bit off the peaks they established early in the month. Within the S&P 500, consumer discretionary and consumer staples stocks led the gains, with the former helped by news of Disney’s purchase of much of 21st Century Fox. Materials and utilities shares lagged, and energy shares were also weak despite international oil prices climbing above $65 on Tuesday, their highest level since June of 2015. A late-November agreement between OPEC and non-OPEC member Russia to extend production cuts has pushed up prices, and recent pipeline shutdowns and other disruptions have provided further supply pressure.

Trading volumes were subdued at the beginning of the week but picked up as traders awaited the outcome of the Federal Reserve’s policy meeting. The meeting resulted in few surprises, however, with the Fed announcing its third quarter-point rate hike of the year, as was almost universally expected, while keeping its rate outlook for 2018 intact, anticipating three more hikes next year. The Fed’s failure to adjust rate expectations higher weighed on financials a bit, however, as did a soft November inflation reading.

Uncertainty over the progress of House and Senate Republicans in finalizing tax reform legislation sparked some volatility late last week. On Thursday, stocks turned lower after reports surfaced that Senator Marco Rubio would vote against the bill unless it included a larger child tax credit for low-income families. Traders seemed to regain confidence that the bill would pass, however, and financials led a rebound when trading resumed Friday morning. Republican leaders increased the child tax credit, however, and agreement was reached on Friday, pushing stocks higher to close out the week.

Longer-term bond yields were largely unchanged last week, with strong November retail sales data helping offset soft inflation figures. Flows were light.

Major European stock indexes were modestly down last week, although the UK’s FTSE 100 recorded gains. Stocks were mixed throughout Asia. However, economic data showing that China’s growth cooled last month and several tightening measures by its central bank are the latest signs that it could be entering a long-awaited slowdown after surprisingly strong growth in 2017.

[ctct form=”269″]

Mostly Higher

Domestic stocks turned positive for the week on Friday after the November jobs report came in much stronger than expected, underlining the economy’s strong fundamentals. Both the Dow and the S&P 500 closed out their third straight weekly advance, while the Nasdaq ended in slightly lower territory for the week, its second consecutive decline.

The U.S. economy created 228,000 jobs in November, above the 200,000 that had been expected, according to the Bureau of Labor Statistics. The unemployment rate held steady at 4.1 percent while wages rose 0.2 percent. The report was the latest indication that the economy is running at close to full tilt, which could lead to the Fed being more aggressive in changing its monetary policy and raising short-term interest rates.

Besides the jobs report, a reading on consumer sentiment fell to a three-month low in December, coming in below analyst expectations. Separately, wholesale inventories fell 0.5 percent in October. Friday also brought the welcome news that both the Senate and House had approved a two-week funding bill late Thursday, staving off a threatened government shutdown this weekend. The bill was signed by President Trump on Friday and buys the GOP a little more time to hammer out a longer-term deal.

In Europe, stocks rallied due to a breakthrough in Brexit divorce talks between the UK and the EU. After days of tense negotiations, Jean-Claude Juncker, president of the European Commission, said on Friday that “sufficient progress” has been made for talks to move on to the second phase, which will cover trade agreements and a potential transition period. The Stoxx Europe 600 logged its highest close since November 9, according to FactSet data. Asian stocks closed firmly in positive territory last week. So did oil, while gold fell again.

[ctct form=”269″]

Tax Legislation Pushes Stocks Higher

Domestic stocks were mostly higher last week, although the dispersion of returns among the major indexes was noteworthy. The narrowly focused Dow notched its best weekly gain for the year while the tech-heavy Nasdaq recorded a loss (although it joined the other indexes in reaching an intraday record high on Tuesday before falling back later in the week). We have also seen a record 13 months in a row of gains for the S&P 500 (when including dividends) and the longest streak ever without a 3 percent correction. Financials outperformed as an increase in longer-term U.S. Treasury yields boosted the outlook for bank lending margins. The rising yields hurt real estate stocks, however, by making their relatively high dividend payments less attractive in comparison. Energy stocks were stronger after crude prices rallied following an agreement between OPEC, Russia, and other major oil exporters to keep current production limits in place through 2018.

A number of factors were seen as boosting sentiment during the week, but chief among them was progress on Senate Republicans’ efforts to reduce corporate tax rates as part of their broader tax reform package. As things stood at the end of week (the Senate passed its bill in the few hours of Saturday morning), however, the Senate’s tax plan differed considerably from the House version, meaning that Republican leaders will still have to work out compromises in a conference committee.

While generally supportive, the political environment also sparked some volatility in the markets. Stocks dropped sharply midday Friday after reports surfaced that former National Security Advisor Michael Flynn had pleaded guilty to misleading the FBI and was cooperating in the Mueller investigation. Earlier in the week, the latest launch of a North Korean ballistic missile also weighed on sentiment and appeared to spark another midday sell-off.

The Senate’s tax bill may have also contributed to sharp declines in tech and internet-related stocks on Wednesday. Netflix fell nearly 6 percent, and semiconductor maker Nvidia dropped over 7 percent. These multinational businesses currently pay relatively low effective tax rates (due to various deductions and credits), making lower rates with fewer exceptions less beneficial to their earnings. A simple desire to lock in substantial recent gains may also have been at work, however. Before the declines, for example, Nvidia stock had more than doubled since the start of the year.

The week’s economic data was also generally constructive. Pending home sales rose at the fastest pace in eight months in October, and the Conference Board’s gauge of consumer confidence surprised on the upside. The Commerce Department also slightly raised its estimate of third-quarter gross domestic product growth, which showed the economy expanding at an annualized pace of 3.3 percent, its best showing in three years. Corporate profits rose to an annualized rate of $1.86 trillion, a new record.

The strong economic signals and the improved prospects for tax cuts pushed U.S. Treasury yields higher last week. Positive comments about the economy from Federal Reserve Chair Janet Yellen provided further upward pressures on yields.

Most major European stock markets closed lower last week, weighed down in part by uncertainty surrounding the passage of tax reform in the U.S., weaker-than-expected inflation in the eurozone, and not much apparent investor enthusiasm following a report of robust manufacturing data in the region. The STOXX Europe 600 Index ended the week lower, as did Germany’s blue chip DAX 30. The UK’s FTSE 100 was hurt by the strength of the pound, which can impede the profits of multinational companies that earn revenue in foreign currencies. In Asia, performance was mixed. Japanese stocks advanced for the week, powered by gains in financial stocks.

[ctct form=”269″]

Back in the Black

Despite quiet trading and a holiday-shortened week, the S&P 500 and the Nasdaq finished last week at all-time highs, with all three main domestic benchmarks (including the Dow, which closed less than one-half a percentage point off its all-time high) booking their first weekly gains in three weeks. Seven of the 11 main sectors of the S&P closed in positive territory. Tech and materials shares led gains, while telecoms lagged. Meanwhile, the Russell 2000 index, the benchmark gauge of small companies, also closed at a record and up 0.3 percent for the week.

General Electric shares climbed modestly on Friday, up 0.3 percent, after a Securities and Exchange Commission filing reported that board member James Tisch bought three million shares worth $53.7 million late Wednesday. That comes on the heels of purchases of a total about $2 million in stock by the company’s new chief executive, John Flannery, and board member Francisco D’Souza, over the past week. GE shares closed at a 6 ½-year low on Tuesday amid disappointment over the conglomerate’s turnaround plan and have lost 42 percent of their market value since the start of the year.

On the data front, a survey of purchasing managers showed that businesses grew in November at the slowest pace in four months. A report on strong existing home sales in October appeared to be partly responsible for the market’s strong rise on Tuesday. Weekly jobless claims also remained near historic lows, but October durable goods orders declined 1.2 percent for the month, falling well short of consensus estimates for a small gain.

The minutes from the Federal Reserve’s October 31-November 1 policy meeting, released on Wednesday afternoon, were generally interpreted as dovish, with several Fed officials expressing concern about the persistence of below-target inflation. The Fed minutes and the durable goods data helped reverse a small rise in longer-term Treasury yields earlier in the week and pushed bonds into positive territory for the week as well.

European stocks also ended higher last week, although markets there teetered after German preliminary coalition talks collapsed over the previous weekend. Currency markets had limited data to trade on, and the U.S. dollar touched a five-week low versus the euro. In Asia , stocks moved mostly higher as well, with China’s Shanghai Composite stabilizing after a notable losing streak.

U.S. oil futures settled at more than two-year highs ahead of an important meeting of producers. Energy stocks saw good gains following the shutdown of imports from the TransCanada Keystone pipeline. The closure of the pipeline following a leak in South Dakota is expected to reduce deliveries to the U.S. by around 85 percent through the end of the month. The ICE U.S. Dollar Index fell and gold futures ended modestly lower.

[ctct form=”269″]

Volatility Returns (sort of)

U.S. stocks finished last week modestly lower in general, with the S&P 500 and the Dow marking a second week of declines as traders weighed prospects for corporate tax cuts and assessed another round of corporate earnings. The S&P 500 closed 0.1 percent lower, while the Dow declined 0.3 percent. The Nasdaq, which closed at a record high on Thursday before a bit of a sell-off on Friday, posted a 0.5 percent weekly gain. The large-cap indexes were generally flat to modestly lower for the week, while the smaller-cap benchmarks managed gains. The week was notable, however, for the S&P breaking a 50-day streak of avoiding a daily decline of greater than 0.50 percent when the index fell 0.55 percent on Wednesday. As The Wall Street Journal and others reported, this was the longest such stretch since 1965. Energy stocks were notable outliers on the downside, as oil prices reversed some of the rally that began in early October.

The week opened cautiously, as some soft data on Chinese industrial production caused a modest rotation toward safety and in the direction of the defensive utilities and consumer staples sectors, in particular. Heavily weighted General Electric fell nearly 7.2 percent on Monday after the company announced that it was halving its dividend. GE fell another 5.7 percent on Tuesday, while energy and materials stocks led the broader declines on the China data. Worries over China and a disappointing forecast for holiday earnings from retailer Target further weighed on sentiment on Wednesday.

Thursday brought a solid rebound, but most attributed it less to any specific development than a need for traders to cover short positions as well as a general move to “buy the dip.” Small-caps outperformed as traders seemed to seek out areas of the market that had lagged in recent weeks. The House passed its tax plan on Thursday. It cut the top corporate rate all the way to 20 percent, as originally promised, but traders appeared to keep at least one eye trained on the significant hurdles to tax reform that lay ahead in the Senate. The Senate Finance Committee did approve a tax bill, but it varies significantly from the House version and will need to be debated and voted upon by the full Senate in the weeks ahead.

Last week’s economic data were generally favorable. U.S. retail sales increased 0.2 percent in October, and housing starts and permits posted unexpected gains, rising 13.7 percent and 5.9 percent, respectively. The October producer price index rose 0.4 percent in October, more than anticipated. The consumer price index rose only 0.1 percent in October, but the core rate (excluding food and energy prices) rose 0.2 percent, a bit more than expected. Most analysts expect core inflation to pick up a bit in the coming months, partly because a spell of intense price reductions in communications services early in the year appears to have ended. Most also expect the Fed to raise rates again at the December 12–13 monetary policy meeting.

The modestly higher inflation data appeared to have little impact on longer-term U.S. Treasury yields, which continued to reflect subdued expectations for growth and price pressures. The yield on the benchmark 10-year U.S. Treasury note actually declined for the week. Short-term rates continue to rise at a faster rate than longer-term rates, and many analysts now expect a relatively flat yield curve by the second half of 2018.

European equities were down last week, pressured in part by disappointing corporate earnings and euro strengthening. Europe’s major indexes began the week in the red, briefly rose midweek on the back of some encouraging economic data, but then receded again by the end of the week. Traders postulated that the euro’s strength, coupled with the continuation of the “sell the winners” narrative, contributed to the underperformance, particularly in Germany and Italy. A strengthening UK pound hurt the shares of the blue chip multinationals listed on the FTSE 100, which ended the week lower. The STOXX Europe 600 Index and Germany’s commodities-heavy DAX 30 were also down.

In Asia, Japanese stocks declined for the week, ending a nine-week stretch of consecutive gains for the benchmark Nikkei 225. Chinese stocks were also lower, on the weaker IP data noted above.

But for energy, telecom and, to a much lesser extent, consumer staples, the S&P 500 and its constituent sectors have performed brilliantly this so far year (as shown above), even if a little less brilliantly than most of the rest of the world.

[ctct form=”269″]