The WMA Weekly Market Wrap v. 171031

October 31, 2017

Even More All-Time Highs

Most of the major domestic equity benchmarks closed higher last week and moved further into record territory. The broad market S&P 500 recorded a seventh consecutive weekly gain, its best stretch in nearly three years. The tech-heavy Nasdaq performed best, helped by a surge in Microsoft, Amazon, Alphabet (Google’s parent company), and Intel at the open of trading on Friday following the release of better-than-expected earnings reports the previous evening. The small-cap Russell 2000 lagged and recorded a small loss for the week. Tech stocks led the week’s gains, while health care shares fared poorly.

Last week brought the heaviest flow of third-quarter earnings reports, with 180 of the S&P 500’s constituents reporting results. The pace of important reports picked up in particular on Tuesday, when strong results from Caterpillar, 3M, General Motors, and Corning provided a boost to the industrials sector and the overall market. The health care sector lagged as investors were disappointed in sales trends for some major drug-makers. Drug stocks also suffered later in the week from President Trump’s speech on efforts to address the opioid crisis and his vow to crack down on “bad actors” in the industry. News that Amazon had filed for drug distribution licenses in several states also weighed on health care service providers.

The week’s economic data were generally favorable. On Wednesday, the government reported that durable goods orders had risen by a healthy 2.2 percent in September, while new home sales in the month were much stronger than expected. Friday brought news that the economy had grown at an annualized rate of 3.0 percent in the third quarter, in line with the previous quarter’s 3.1 percent and evidence of resilience in the face of hurricanes in August and September. The last time the economy had two consecutive quarters of 3 percent growth was in 2014. The government said it could not say exactly how much hurricanes Harvey and Irma sliced from growth in the quarter. Because Puerto Rico is not a state, hurricane Maria does not factor in the government’s GDP calculations.

Rebuilding activity in the wake of the hurricanes should help growth remain relatively strong in the fourth quarter, outstripping the roughly 2 percent pace of expansion over the past few years. The University of Michigan reported consumer sentiment in October was the strongest it has seen in 13 years. The strong data may have weighed on overall sentiment by suggesting that the Federal Reserve might step up its pace of interest rate increases, but financial stocks benefited as higher interest rates augur well for bank lending margins while interest rate sensitive holdings (e.g., REITs) suffered.

The dollar rose across the board after the House of Representatives passed a budget resolution on Thursday, which was viewed as an encouraging sign for tax cuts. Oil prices were higher but gold was lower.

The positive economic signals had a direct effect on the bond market too, helping push the yield on the benchmark 10-year U.S. Treasury note to its highest level since March on Friday morning. Progress in Congress on GOP efforts to develop tax reform legislation also contributed to rising yields, although reports Friday morning that President Trump was favoring Fed Governor Jerome Powell as the central bank’s next chair seemed to send yields lower at the end of the week. Many view Powell as likely to continue Janet Yellen’s patient approach in raising short-term interest rates.

At the end of trading on Thursday, Bill Gates occupied the top spot in the Bloomberg Billionaires Index, with a net worth of $88 billion. Amazon’s Jeff Bezos was second at $83.5 billion, but a jump in Amazon stock of 13.5 percent on Friday due to huge earnings pushed Bezos ahead, despite a very good day for Microsoft too.

Corporate earnings, central bank moves, and political instability were all key drivers for European stocks last week. The STOXX Europe 600 Index ended the week higher, with tech and consumer shares providing a lift at the end of the week. Germany’s DAX reached a record high following good economic news and a string of positive earnings reports. While the blue chip FTSE 100 ended flat, it was supported by a weaker pound, which boosts the value of many of its listed companies that bring in revenue from outside of the UK.

The European Central Bank (ECB) announced that will halve its bond-buying program to €30 billion from €60 billion a month from January through September 2018, or longer, if necessary, until inflation is revived. The move was widely expected, with the market generally delivering a muted response following the news. The ECB left its guidance on interest rates unchanged, promising to maintain its current rates until well beyond the end of its asset purchases.

The dramatic escalation of a political crisis in Spain hit that country’s benchmark stock index on Friday. Losses on the Ibex 35 reached nearly 2 percent after separatist leaders in the wealthy region of Catalonia voted to establish an independent state. The euro also weakened against the dollar, reflecting fears that the dispute could escalate into another major crisis in Europe. The declaration drew an immediate response in Madrid, where the national Senate voted to seize control of the autonomous region. Spanish stocks and the euro both recovered some lost ground following the response from the central government.

In Asia, most markets rallied. Japanese stocks remained on an upward trajectory, marking seven weeks of gains. Although the string of consecutive daily gains (16 trading days) ended on Wednesday, it was the Nikkei’s longest-ever winning streak and took the benchmark to a 21-year high.


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