Modestly Higher

Most of the major domestic equity indexes closed last week with modest gains. The tech-heavy Nasdaq performed best, aided by strength in semiconductor stocks early in the week. Better-than-expected results from Hewlett-Packard gave a further boost to tech shares on Friday. Utilities and materials stocks also performed well, while real estate shares lagged as interest rates rose. Consumer staples shares also underperformed, as Wal-Mart sold off early in the week following an earnings miss and guidance that disappointed.

Some stability in closing levels masked considerable intraday swings in the major indexes. After rising when trading resumed on Tuesday morning, stocks reversed course and fell sharply in the afternoon. Traders noted a lack of consensus to explain the selling, although many pointed to some combination of continuing worries over recent volatility, rising interest rates, and the S&P 500 breaking below its 50-day moving average of 2,725.

Intraday volatility continued on Wednesday, when attention seemingly turned to the release of minutes from the Federal Reserve’s late-January policy meeting. Stocks rose initially following the release but then fell back as traders seemed to detect a more hawkish stance among policymakers — even prior to the release of data showing higher inflation in January and a substantial increase in hourly earnings. The minutes indicated that Fed officials have greater confidence in the near-term economic and policy outlook, and most analysts expect another rate increase following the March 20-21 FOMC meeting. Nevertheless, stocks seemed to get a boost on Friday from the Fed’s semiannual report on monetary policy to Congress, which indicated that officials expected inflation to remain below the Fed’s 2 percent 2018 target.

Note that the Fed’s January meeting predated federal government spending increases that were signed into law on February 9. It is unclear whether the fiscal stimulus from the budget agreement will further bolster policymakers’ confidence in their growth and inflation outlook. In combination with recent tax cuts, the budget agreement is also likely to increase government borrowing considerably such that annual federal deficits will likely exceed $1 trillion in coming years. Last week brought evidence of the first ramp-up in government borrowing, with roughly $258 billion in new issuance from the U.S. Treasury, according to Bloomberg. As the market absorbed the new supply, yields increased across the yield curve to their highest levels in several years while multiple benchmark U.S. Treasury issues on the front end of the curve reached their highest yield levels in a decade. Yields decreased on Friday, however, as traders appeared to join a modest “flight to safety” in anticipation of the upcoming Italian elections.

European stocks ended the week generally mixed with relatively light volume. Despite a heavy week of corporate earnings reports and positive economic indicators, major indexes in the region were subdued. The pan-European index STOXX 600 index was essentially flat as traders seemed to be on guard about the prospect of rising inflationary pressures. The German DAX 30 moved marginally higher following reports of solid demand for German exports. Britain’s FTSE 100 moved marginally lower, weighed down by some disappointing corporate earnings and a report that the unemployment rate in the U.K. rose slightly in the fourth quarter of 2017.

In Asia, the major stock market benchmarks rose modestly last week. Data from Japan show that manufacturing activity and exports remain positive, purchasing managers’ index figures remain solidly in expansive territory, and exports rose 12.2 percent in January, exceeding expectations and marking the 14th straight month of gains. Combined with a slight decline in import growth, the rise in exports helped narrow Japan’s trade gap significantly while employment increased at a faster pace and saw its best growth in 11 years.

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Bounce Back

Domestic stocks carried over the momentum they recaptured on Friday of the previous week and last week recorded their best weekly gain since early 2013. The tech-heavy Nasdaq performed best, aided by solid gains from Apple and Cisco Systems. Along with information technology, financials, health care, as well as industrials and business services outperformed within the S&P 500, while energy shares lagged despite a sharp rally in oil prices on Wednesday. Having entered correction territory (a decline of 10 percent or more off recent peaks) the previous week, the indexes ended Friday with YTD gains and only 4-5 percent off their January (all-time) highs.

The market’s rebound appeared to be driven in large part by diminishing fears about higher inflation and interest rates despite some evidence of inflation in the data. Wednesday morning’s CPI came in a bit higher than expected, on both a core (excluding energy and food prices) and overall basis. Stock futures dropped on the release of the figures, but the market recovered its footing later in the day and ended solidly higher. A sharp rise in the prices of apparel as well as home furnishings and supplies was responsible for much of the rise in core inflation, but a similar spike in those categories a year ago was offset by declines in later months. PPI, released on Thursday, was in line with consensus estimates overall, but higher than anticipated on a core basis. This report didn’t seem to register much impact either.

Volatility measures fell back last week too, while trading volumes declined Tuesday to their lowest level in over a month. ETFs and systematic trading vehicles, while continuing to play a higher-than-average role in trading activity, also seemed to diminish somewhat in perceived importance. Nevertheless, some traders were keeping an eye on risk parity funds (an investment strategy that involves shifting allocations between assets in response to volatility) as a potential source of further selling, even though there is little evidence that these funds are a problem.

Aside from inflation, the week’s economic data were mixed. Retail sales fell 0.3 percent in January, with core retail sales (excluding autos and gasoline) falling 0.2 percent, the largest drop in nearly a year. December sales were also revised downward. Weekly initial jobless claims rose slightly but remained near historic lows. Industrial production also fell slightly in January, weighed down by a decline in mining output. Corporate profit growth seemed to be continuing to fire on all cylinders, however. Data and analytics firm FactSet again revised its estimate of fourth-quarter profit growth for the S&P 500 upward, to 15.2 percent (on a year-over-year basis), its best pace since late 2011.

Perhaps reflecting the balance between higher inflation data and mixed economic signals, the yield on the benchmark10-year U.S. Treasury note touched a new four-year high of 2.93 percent but ended last week only modestly higher. The midweek release of January inflation and retail sales data appeared to weigh on sentiment a bit.

European stocks ended last week higher too, with most major indexes showing strength in a variety of sectors as concerns about rising interest rates and inflation seemed to ease there as well. The pan-European STOXX 600 index couldn’t recover the steep losses it logged from the week before, but the appetite for European shares was nevertheless robust, as the STOXX 600 rose around 3 percent for the week. Blue chip indexes, including Germany’s DAX 30 and the UK’s FTSE 100, also strengthened. Tech, banking, and natural resources shares were some of the notable outperformers.

As in the U.S., volatility also trended lower in Europe last week while the euro strengthened against the dollar. A strong euro versus other countries depresses revenue for European companies that sell their goods in overseas markets.

Asian markets also advanced nicely last week, although activity was fairly light there due in large part to a holiday-shortened week. Departing from its usual practice, the People’s Bank of China reportedly drained $216 billion from the country’s financial system in the weeks preceding the Lunar New Year holiday. The PBOC’s recent austerity — following years in which the central bank routinely pumped money into markets to ensure ample liquidity for banks and investors — was seen as part of Beijing’s ongoing crackdown against excessive risk-taking fueled by readily available money.

Correction Territory

Last week’s stock market price action has taken the S&P 500 into correction territory (down 10 percent from the highs) for the first time in two years. Whether we get to “bear territory” is another matter. Of the fifteen true corrections from record highs since 1928 (prior to this one), ten turned into full-blown bear markets while five did not. The average bull market correction is 13 percent and takes just four months to recover, according to Goldman Sachs research. But the pain lasts for 22 months on average if the S&P falls into bear territory. The average decline is 30 percent for bear markets. Perhaps most importantly, stocks have spent 55 percent of the time since 1928 at least 10 percent off the highs, so whether we get to bear territory or not, we’re in completely normal territory.

For the 54 million Americans who are actively contributing to 401(k)s, in 550,000 plus corporate retirement plans across the country, should current levels stand, when they get their next paychecks they will be buy 10 percent more of the stock mutual funds to which they allocate without doing anything. Even though the stock market is the only place I know of where people don’t want to buy on sale, this is fantastic news for anyone who is funding a goal years out into the future.

But that doesn’t mean it’s easy.

There have been a wide variety of proffered explanations for the sudden downturn. As usual, there are some great stories being told now, all with crystal-clear hindsight.

Here are six, although some of them are less explanations and more cries of anguish. None is altogether convincing, which shouldn’t be surprising in that the markets do not need a reason — a trigger — to drop. The explanation I think the most plausible follows. But your mileage may vary.

As reported in this space last week (see here and here), two Fridays ago the U.S. Department of Labor released a strong jobs report showing wages rising at their fastest rate since the global financial crisis nearly ten years ago. The stock market promptly proceeded to plummet, a beating that continued on Monday and Thursday and which has led to much volatility all week. Although I addressed this point last week, it is helpful to reiterate why good news for workers and the economy is bad news for the stock market. The short answer is that the stock market and the economy are quite different things.

Right now, traders seem to be worried that if wages rise too fast, the Federal Reserve will hike interest rates in order to head off inflation down the road. When, earlier this year, the central bank suggested that it would raise rates, much of the market was skeptical, in part because inflation has been so subdued for so long and because the Fed has been reticent to raise rates too fast. However, faster pay gains for workers make it more likely the Fed will follow through, both because rising wages are a sign that the whole economy is heating up and because employers will eventually have to raise prices to keep up with the cost of labor.

Matters were made worse this past Friday in the wee hours of the morning. Republicans have generally been seen as opposed to federal debt and budget deficits. However, Friday’s government funding deal, on the heels of the recent tax cut package, will likely cause the 2019 deficit to balloon to $1.2 trillion, with trillion-dollar deficits to continue indefinitely. Putting aside the policy implications, that’s highly inflationary. Not surprisingly, stocks suffered a rapid sell-off on Wednesday following word that Senate leaders had reached the spending deal that came to fruition early Friday.

If the Fed does hike rates quickly, the pace of growth should slow a bit and could put a damper on corporate profits. But that’s probably not the main reason the market is all worked up. Stock prices have been supported for almost a decade by low interest rates around the world. Investors (especially retirees) haven’t been able to make much money on safer assets like American and European government bonds. Instead, they’ve piled money into riskier bets like sovereign debt from developing nations and stocks. As interest rates go up, and money managers (retirees too) can make a better return on vanilla investments like U.S. Treasuries and other bonds, we should expect stocks to deflate a bit.

The current volatility is a good reminder that the Dow and the S&P are not barometers for the well-being of the whole economy. Indeed, the Dow isn’t even a good barometer of the stock market. Sometimes prices go up because the economy is doing well. Sometimes they go down because of it. And as of this month, the economy seems just a bit too strong for the market’s taste.

So let’s get down to particulars. Last week, domestic stocks suffered their worst weekly decline in two years. The major benchmarks fell largely in tandem, and all entered correction territory. Friday was especially volatile, although stocks ended the day up a bit after a late rally. Things could have been much worse! Despite the downturn, the S&P 500 is still up over 13 percent from a year ago.

Much attention was focused on the narrow Dow Jones Industrial Average last week, which suffered declines on both Monday and Thursday exceeding 1,000 points, the largest (by points) in history, if not close to a record in terms of percentages. On a percentage basis, the Dow’s 4.6 percent drop on Monday ranked only 25th among declines since 1960 and 108th overall. Having reached all-time lows in 2017, the CBOE Volatility Index (VIX), spiked to its highest level in several years. No sector escaped the downdraft, and correlations — the tendency of stocks to move in sync with each other — increased as selling pressure intensified late in the week.

Thursday brought further evidence of a tightening labor market, with weekly jobless claims falling to their lowest level since January 1973, when the U.S. labor market was a little over half its current size. Much of the week’s other economic data also surprised on the upside, increasing the prospects for higher inflation and interest rates. The Institute for Supply Management’s gauge of service sector activity rose more than expected, as did wholesale inventories in December. New job openings declined a bit, however. Despite inflation and deficit fears, longer-term U.S. Treasury yields dropped slightly as investors sought government bonds and other perceived “safe havens.”

The market’s sharp decline stood in contrast to continued favorable news about corporate earnings. As the fourth-quarter earnings reporting season began to wind down, data and analytics firm FactSet raised its estimate of overall earnings growth (on a year-over-year basis) for the S&P 500 to 14.0 percent, which would mark the third quarter in the past four of double-digit gains. Accordingly, economic and earnings fundamentals continue to be constructive for stocks, despite the price action.

European stocks were down overall during a week of volatility and fears about the global ramifications of a broad stock sell-off in the U.S. Early last week, the pan-European benchmark Stoxx 600 posted its biggest one-day percentage drop since June 2016. Despite a brief respite midweek, European stocks continued to slide as the week came to a close. The UK blue chip FTSE 100 Index, whose companies earn much of their revenue from outside the UK, dropped to a one-year low, hobbled both by the global rout in equities and a weakened pound. Germany’s DAX 30 and France’s CAC 40 were also weak. Banks, utilities, and energy stocks were notable laggards.

The week was not devoid of good economic news in Europe, however. Quarterly corporate earnings reported during the week were largely positive there too. China’s demand for European imports remained strong, and French industrial production rose more than expected in its latest reading. In Germany, Chancellor Angela Merkel finally hammered out a new government coalition between her conservative alliance and the left-leaning Social Democrats. Alas, investors shrugged at the news, as the German DAX and the euro barely moved following the announcement.

Asian stocks followed suit. The Nikkei was off more than 8 percent for the week and the dollar weakened further. Chinese stocks ranked among the biggest losers last week as domestic benchmarks in China slid more than 10 percent from their most recent peaks. In previous sell-offs, Chinese state-backed funds have stepped in and bought shares to stem market declines, but there was little evidence of state-led buying this time.

While last week’s pain is still fresh, there are some good lessons to be learned.

1.    Trying to time the market is dangerous business indeed. Although many (most?) analysts recognized the the market was pricy, nobody called this correction specifically. Moreover, the U.S. and virtually all global economies remain strong and are generally improving. Perhaps most tellingly, those who may have escaped some or all of the current drawdown have no good idea when or how to get back in.

2.    Hedges need to be diversified. Between late 2007 and early 2009, from the stock market’s peak to trough, the average managed-futures hedge fund gained 12 percent while stocks dropped 41 percent. On Monday, when the S&P lost 4 percent, managed futures funds lost 3 percent. They were trend-following, as advertised, but the trend turned on a dime. They turned out to be long and wrong, like the market generally. If that was your only hedge, you weren’t really hedged at all.

3.    Picking up nickels is dangerous. Those who sell (write) options are said to be “picking up nickels in front of a steamroller.” The fast turn in market fortunes hurt those nickel-picker-uppers a lot last week. For example, those whose option-writing effectively shorted volatility, got crushed (e.g., LJMIX lost more than 80 percent). Writing options can seem like easy money. It isn’t.

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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.

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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.

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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.

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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.

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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.

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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.

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