Narrowly Mixed
The major domestic stock indexes closed last week mixed. The large-cap indexes outperformed, and the broad S&P 500 managed to extend its string of weekly gains to eight, its best stretch in four years. The Dow and the Nasdaq were marginally higher as all three closed the week at record highs. It was the Nasdaq’s 63rd record close this year, the most ever On the other hand, the small-cap indexes recorded losses, extending a pattern of underperformance that has been in place for a month. On a sector basis, tech, energy, and the small real estate segment led the gains within the S&P, while materials and consumer discretionary shares lagged.
Last week was again an active one for third-quarter earnings reports, with firms representing nearly one-quarter of the S&P 500’s market capitalization reporting results. On Thursday evening, Apple, the largest firm in terms of market cap, reported results that generally exceeded analysts’ expectations, providing a particular boost to the tech-focused Nasdaq on Friday morning. Analysts polled by data and analytics firm FactSet continue to expect an overall slowdown in earnings growth in the third quarter, however, with profits for the S&P 500 rising by roughly 6 percent on a year-over-year basis, as compared with double-digit gains in the first half of 2017. However, many observers expect earnings to pick up as hurricane-related disruptions recede.
The week’s political calendar was also exceptionally busy. On Monday, Special Prosecutor Robert Mueller announced the first indictments and a guilty plea in his investigation into Russian interference in the 2016 election, which weighed somewhat on sentiment. Traders also seemed to react poorly to rumors that the GOP’s tax reforms would phase in corporate tax cuts, rather than lower them immediately. These fears proved unfounded when Republican House leaders released their draft bill on Thursday, which called for an immediate cut in the top corporate rate to 20 percent. Less favorably for the market, the draft bill also incorporated a one-time tax on repatriated profits, new limits on the deductibility of interest expenses, and a five-year sunset on the deductibility of capital investments. Finally, President Trump announced on Thursday his nomination of Federal Reserve Governor Jerome Powell to become the next chairman of the central bank. Powell is widely considered likely to follow his predecessor’s gradualist approach to rate increases.
Longer-term U.S. Treasury yields rallied back from multi-month highs in reaction to both Powell’s nomination and mixed economic signals. Personal spending increased at a solid pace in September, and the Conference Board reported that its gauge of consumer confidence had reached its highest level in nearly 17 years. A gauge of manufacturing activity, while still strong, slightly missed expectations, however. Friday’s closely watched monthly payrolls report also fell short of expectations, despite a slight reduction in the unemployment rate (to 4.1 percent), but many observers noted that the hurricanes were still creating volatility in the data. Oil prices held mostly steady last week after ending the previous week at a nine-month high.
A busy calendar of corporate earnings and solid economic data pushed European stocks into positive territory fast week. The STOXX Europe 600 Index ended the week higher, almost touching a 10-year high midweek before it receded. The blue chip German index DAX 30 also performed well, reaching an all-time high. Spain’s IBEX 35 ended flat but was strengthened early in the week, as sentiment improved after a lack of a violent reaction to the Spanish government taking control in Catalonia over the weekend. Across Europe, solid manufacturing data from China supported mining and automobile stocks.
In Japan, the major stock market benchmarks advanced, marking their eighth consecutive week of gains. The bellwether Nikkei 225 advanced 2.41 percent last week and is up 17.92 percent for the year to date.
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