The WMA Weekly Market Wrap v. 180109

January 9, 2018

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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