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.