The WMA Weekly Market Wrap v.180117

January 17, 2018

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 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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