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Market Commentary, December 11, 2017 For the week of December 11, 2017

Key Market Data

12/01/2017 12/08/2017 One Week Change YTD One Year
S&P 500 Index 2,642.22 2,651.50 +0.35% +20.72% +20.45%
MSCI EAFE Index 2,003.72 2,005.31 +0.08% +22.79% +23.55%
Barclays Capital U.S. Aggregate Bond Index 2,042.83 2,042.43 -0.02% +3.34% +3.48%
10-year Treasury Note Rate 2.362% 2.377% +1.5 basis points -6.8 basis points -3.1 basis points

Stocks spent most of last week meandering as investors tried to figure out which businesses and industries would benefit, or not, from the reconciled tax cut bill that Republican leaders were working on.

On Friday, however, both the S&P 500 and the Dow Jones Industrial Average closed at record highs, propelled by a better-than-expected jobs report for November. The news brought an end to a five-day losing streak for the S&P 500.

The indexes took off after the Labor Department said that 228,000 jobs were created last month – the forecast was for 195,000 – and the unemployment rate remained at 4.1%, a 17-year low. In addition, it was the 86th month in a row that the economy has added jobs. The labor force participation rate was unchanged at 62.7%. Wage growth still lagged, up 2.5% over the last year, but it continued to outpace inflation. Investors and economists are assuming the Federal Reserve will raise its rate for the third time in 2017 when it meets this week – the Fed has forecast another three rate hikes in 2018 if the economy stays on track. Average weekly paychecks increased by 3.1% over the past 12 months, the highest reading in almost seven years, mostly because Americans are working longer hours. Based on the news about jobs, estimates for third-quarter growth are coming in above 3%; should that happen, it would be the first time that gross domestic product (GDP) growth would be at or above 3% for three quarters in a row since 2004 to 2005.

The government gets a two-week extension

At the same time that the GOP is working to reconcile the House and Senate versions of the tax cut plan, which it’s expecting to do before the holiday recess, both sides of the aisle have to come to an agreement on funding the government for fiscal 2018. Last week, the two sides agreed on an extension through Dec. 22, and the presumption is that the job will get done because neither side will want to shut down the government right before Christmas.

Brexit breakthrough

After more than six months of wrangling, negotiators from Great Britain and the European Union (EU) are finally ready to begin to discuss their post-Brexit economic relationship. The two sides ironed out issues over Britain’s unpaid debts and the status of EU citizens in Britain, though the details over how to handle the border between Northern Ireland and Ireland, which will remain in the EU, remained unresolved. Both sides hailed the progress, with Jean-Claude Juncker, president of the European Commission, saying, “I believe we have now made the breakthrough we needed,” and Prime Minister Theresa May, who has been under fire at home, saying, “I am optimistic about the discussions ahead.”

The EU and Japan make a deal

The EU and Japan finalized a free trade agreement that would encompass countries accounting for a combined GDP of about $20 trillion, or one-fourth of the world’s economy. A joint EU-Japan statement characterized the agreement as a “clear signal” of commitment to have fair and open markets, as they continue “fighting the temptation of protectionism.” The agreement still needs to be approved by EU and Japanese lawmakers.

Basel III

Completing a process they began in 2008, European regulators signed off on new financial guidelines known as Basel III to help avert another recession and to strengthen the regulation, supervision and risk management of banks. Mario Draghi, president of the European Central Bank, said of the agreement, “It’s a great day,” but added, “nothing is crisis proof.” The rules won’t take effect until 2022, and only after each EU country has approved the legislation.

China’s exports and imports surge

China’s exports for November were well above expectations, up 12.3% from a year earlier compared to a 6.9% increase in October. Still, the news was seen as something of a mixed blessing as the trade gap with the United States remained above $25 billion for the sixth month in a row. That could lead to push-back from President Donald Trump who has singled out China for its unfair trade practices. Imports also outperformed, rising 17.7% from November 2016.

In other news, the Fed reported that U.S. household wealth rose $1.7 trillion to a new high of $96.9 trillion in the third quarter, thanks to the ongoing stock market surge and higher property values. Debt as a percentage of GDP fell to 77.2%, its lowest level in more than a decade. The Fed also said that consumer credit jumped $20.5 billion in October, the most since November 2016. WardsAuto reported that vehicle sales came in at an annualized rate of 17.35 million in November, down 1% from a year earlier and off 3.6% from October. Factory orders fell 0.1% in October from the month before; orders for factory goods ex-transportation were up 0.8%. Orders for durable goods were down the same 0.8%, while orders ex-transportation rose 0.9%. Nondefense capital goods orders, excluding aircraft, improved 0.3%, and nondefense capital goods orders shipments ex-transportation increased 1.1%. The J.P. Morgan/IHS Markit Global Manufacturing Purchasing Managers’ Index (PMI) was 54% in November, its highest level since March 2011. Better still, the share of individual countries that saw their PMI’s increase from month to month was 97%, the best such reading since June 2007, and the Eurozone’s PMI was 60.1%, just short of the record high set in April 2000. The Institute for Supply Management’s Non-Manufacturing Index was 57.4% in October after September’s reading of 60.1%. The U.S. trade gap for October was -$48.7 billion compared to -$44.9 billion in September. Wholesale inventories fell 0.5% in October from the month before. Third-quarter nonfarm productivity was 3%, unchanged from the second quarter. And first-time jobless claims for the week ending Dec. 2 fell 2,000 to 236,000; the four-week moving average dipped 750 to 241.500.

A look ahead

In addition to the Fed’s last meeting of 2017 on Tuesday and Wednesday, there will be updates on small business optimism, the Consumer and Producer Price Indexes, retail sales, business inventories, industrial production and capacity utilization.