The Rally Continues
Domestic stocks continued their advance into record territory, marking the fifth consecutive weekly gain for the large-cap Dow and S&P 500 indexes. The gains were modest, however. The small-cap Russell 2000 lagged and recorded a modest loss for the week. Thus far in 2017, the Dow has gained nearly 16 percent, the S&P has risen 14 percent, and the Nasdaq has returned about 23 percent.
Last week brought the first releases of major third-quarter earnings reports, with JPMorgan Chase and Citigroup falling Thursday after reporting lower fixed income trading revenues and higher set-asides for credit card losses. Wells Fargo reported an earnings decline on Friday, further weighing on the broader financials sector. Consumer staples stocks performed well, boosted by a surge in Wal-Mart shares after the retail giant announced a massive share repurchase program and predicted a strong rise in online sales.
Even with the onset of earnings season, the tumultuous political environment continued to play a large role in driving sentiment. Health care services stocks stumbled early in the week as rumors surfaced that President Trump was preparing to loosen regulations to allow less comprehensive and cheaper insurance plans. Stocks of hospitals and other health care providers fell when the president signed an executive order allowing such plans on Thursday, and shares fell further on Friday following news that the administration would also stop providing subsidies to insurers in order to reduce premiums for low-income enrollees in state insurance exchanges.
The Trump administration also said it won’t certify Iran’s compliance with a 2015 nuclear agreement, declaring Tehran a regime that continues to sponsor terrorism and alleging that Iran “intimidated international expectations” sent to inspect it from building up nuclear armaments. The president laid out a new strategy to deal with Iran and warned that he could cancel U.S. participation in the nuclear pact at any time. The strategy includes placing additional sanctions on the Iran regime to block its “financing of terror,” said Mr. Trump.
A series of positive economic reports seemed to help compensate for the ongoing political disruption. Initial jobless claims during the previous week fell sharply, as the impact of Hurricanes Harvey, Irma, and Maria on the labor market appeared to be dissipating. Retail sales also jumped in September, reflecting further resilience in the face of the natural disasters. Best of all, consumers entered October feeling better about the economy than they had in 13 years, according to the University of Michigan’s gauge of consumer sentiment, released Friday.
The hurricanes did have a large impact on September headline inflation data, which jumped in response to a temporary surge in gas prices following the shutdown of Gulf Coast refineries. Recent weakness in monthly core inflation data has drifted further away from the Federal Reserve’s annual inflation target of 2 percent, but most analysts believe the Fed is likely to continue on its path of gradual interest rate increases, with the next rate hike likely to be in December. Policymakers remain concerned that the current level of interest rates is too low and is driving elevated equity valuations. The tame inflation data also fed into a decrease in long-term U.S. Treasury yields last week.
European stocks were higher last week too, with two key benchmark indexes, Britain’s FTSE 100 and Germany’s DAX 30, reaching record highs. A slide in the pound boosted confidence in the multinational companies that dominate the FTSE and generate sales in foreign currencies. Mining stocks were strong, buoyed by solid import demand from China. The pan-European benchmark Stoxx 600 ended the week marginally higher. European equity funds posted solid weekly inflows overall, according to EPFR Global data.
Spanish stocks and government bonds rallied as political concerns eased slightly after Catalan leader Carles Puigdemont symbolically declared independence but stopped short of making a formal declaration. Earlier in the month, Catalonia held a referendum on independence that Madrid ruled illegal and invalid. The yield on 10-year Spanish government bonds had fallen to 1.61 percent by Thursday’s close, well below the peak of over 1.78 percent it reached on October 4. However, Spanish equity funds suffered their second-largest outflows on record last week.
Japanese stocks powered higher last week as the Nikkei 225 surpassed its 1996 peak, but the market still traded at about half of the all-time high it set nearly three decades ago. Recent improvement in the Japanese economy — recording six consecutive quarters of growth through the second quarter — has (yet again) raised hopes that, together with an improving global economy and Bank of Japan stimulus, this could be the catalyst for the long-awaited and endlessly discussed Japanese growth and inflation cycle. Elsewhere in Asia, China stocks advanced as its exports grew strongly in September and the country’s foreign exchange reserves rose for the eighth straight month.