Market Commentary

Financial Markets Commentary For the week of January 02, 2018

Key Market Data

12/22/2017 12/29/2017 One Week Change YTD One Year
S&P 500 Index 2,683.34 2,673.61 -0.36% +21.82% +21.82%
MSCI EAFE Index 2,032.69 2,050.79 +0.89% +25.69% +25.69%
Barclays Capital U.S. Aggregate Bond Index 2,035.93 2,046.37 +0.51% +3.54% +3.54%
10-year Treasury Note Rate 2.482% 2.406% -7.6 basis points -3.9 basis points -3.9 basis points

Happy New Year – and, if you own stocks, happy last year as well, as the market’s major indexes roared to their best finish since 2013.

How good a year was it? Well, the Dow Jones Industrial Average was up 28.1% and reached a new high a record 71 times. The index also rose for nine months in a row, its longest such streak since 1959. The S&P 500 wasn’t far behind, gaining 21.8%, and, for the first time, it was up for every month of the year. The Nasdaq outpaced the other two indexes, soaring 29.7% and briefly passed the 7,000-point mark during the day late in the year. And it wasn’t just a banner year for American stocks, as Hong Kong’s Hang Seng jumped 41.2% India’s Sensex 29.5%, and Japan’s Nikkei 21.2%, while London’s FTSE rose 11.9% and closed out 2017 at a new high.

The stock market’s stellar performance was even more impressive because so few prognosticators and pundits saw it coming. When 2017 began, there was widespread uncertainty about what President Donald Trump, elected but not yet in office, would do. As it happened, his first major legislative victory did not come until the last week of 2017, when the Republicans passed a pro-business tax overhaul, without a single Democrat in either chamber voting for the bill. And, beyond the often rancorous atmosphere in Washington, there were the devastating hurricanes and the war of words between the United States and North Korea for investors to consider. But the stock market remained buoyant as corporate profits strengthened, as consumer confidence hit new highs, as the unemployment rate steadily declined, as the Federal Reserve continued to roll back its accommodative policies with no ill effects, and as economic growth exceeded 3% in the second and third quarters.

Meanwhile, largely thanks to low inflation, U.S. Treasurys traded within a very narrow range last year – the 10-year ended 2016 at 2.445% and closed out 2017 at 2.406%. According to FactSet, the 10-year posted its narrowest annual trading range in a decade. And the dollar struggled in 2017, dropping 10% against a basket of global currencies, according to the ICE U.S. Dollar Index, its worst performance since 2003 and the first year it’s been down since 2012.

Capitol Hill

Before going home for the holidays, Congress deferred one battle until the new year: funding the federal government for fiscal 2018. The Republicans and Democrats agreed to a short-term spending bill to avoid a government shutdown. However, the extension only goes to Jan. 19, after which the two sides will need to work together to keep the government running.

Oil’s resurgence

Oil closed the year on a high note, with American crude finishing 2017 above $60 a barrel for the first time since mid-June 2015. Overall, U.S. crude rose 12% for the year, while Brent crude jumped 18%. The price was given a boost by reduced stockpiles, rising global demand, and the decision by the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producers such as Russia to implement production cuts. And, in a related story, the U.S. is on track to displace Saudi Arabia as the world’s leading crude oil producer this year, thanks in part to OPEC’s oil cuts having been extended through 2018.

The “13th” month

Consumer spending accounts for two-thirds of gross domestic product growth, and, according to some surveys, there was a surge in post-Christmas shopping this year which some retailers have dubbed the “13th month.” According to Shoppertrak, for instance, the day after Christmas was the fourth biggest shopping day of 2017, and a Deloitte survey showed that 40% of Americans planned to shop either online or in stores after Christmas this year compared to just 5% as recently as five years ago.

Around the eurozone

Despite a strong year for the eurozone’s economy, the region ended the year on a down note when separatists won a majority in Catalonia’s parliament. This came after the government of Prime Minister Mariano Rajoy interceded in an earlier referendum by which the region hoped to secede, arrested leaders of the separatist movement, and held elections in the hope that Catalonians against seceding would prevail. Carles Puigdemont, former separatist leader who is in exile in Brussels, said of the election results, “Rajoy and his allies have received a slap in the face from Catalans.”

In other news, the Census Department reported that new home sales were up 17.5% in November from the month before, the fastest pace for all of 2017, though sales were still constrained by low inventory. Sales were up 26.5% from a year earlier. The National Association of Realtors said that pending home sales increased 0.2% in November from October and were up 0.8% from November 2016. The S&P CoreLogic Case-Shiller Home Price Index improved 6.2% from a year earlier in October, compared to a 6.1% year-over-year advance in September. Seasonally adjusted prices were up in all 20 cities tracked by the index. The Conference Board’s Consumer Confidence Index fell to 122.1 in December from the previous reading of 128.6 in November, which was a 17-year high. And first-time jobless claims for the week ending Dec. 23 were unchanged from the week before at 245,000; the four-week moving average rose 1,750 to 237,750.

A look ahead

This week’s updates will include the latest on construction spending, the trade balance, factory orders, orders for durable and capital goods, vehicle sales, and the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes. The Fed will also release the minutes of its December meeting, at which it raised its benchmark rate, and the Labor Department will announce the jobless rate for December, forecast to remain unchanged from the month before at 4.1%.