Market Commentary

Financial Markets Commentary For the week of January 08, 2018

Key Market Data

12/29/2017 01/05/2018 One Week Change YTD One Year
S&P 500 Index 2,673.61 2,743.15 +2.63% +2.63% +23.33%
MSCI EAFE Index 2,050.79 2,100.91 +2.45% +2.45% +25.93%
Barclays Capital U.S. Aggregate Bond Index 2,046.37 2,039.83 -0.32% -0.32% +2.75%
10-year Treasury Note Rate 2.406% 2.477% +7.1 basis points +7.1 basis points +13.2 basis points

A message for those who thought investors were going to take a breather after the stock market’s stellar performance in 2017: think again. The first week of 2018 began with a bang, as the S&P 500 and the Nasdaq hit new highs on all four days of trading, with the former index passing the 2,700-point mark, while the latter surged past 7,000. As for the laggardly Dow Jones Industrial Average, which only set three records, it soared beyond 25,000 points only five weeks after hitting 24,000, leading President Donald Trump to say, “I guess our new number is 30,000.” Stocks continue to be propelled by signs of solid economic growth and steps that the Trump administration has taken, or is planning to take, to spur that growth, such as the end-of-year tax cuts. And investors are showing no signs of pulling in the reins anytime soon – according to the weekly survey from the American Association of Individual Investors, bullish sentiment increased to 59.75% last week, the second highest reading since the current bull market began.

Last week’s record run for stocks ended with the government announcing that 148,000 jobs were created in December, well short of the forecast of 190,000, and the household unemployment rate remained at 4.1%, matching a 17-year low. Investors were undeterred, however, for a number of good reasons. First, 2.1 million jobs were created in 2017, meaning the economy has added at least 2 million positions for seven years straight. Next, there has now been job growth for a record 87 months in a row. And while wages were only up 2.5% year over year, they did inch up 0.3% from November. Earlier last week, ADP reported that the private sector added 250,000 jobs in December, well above the forecast and the highest total since March.

At the Fed, mixed feelings about hikes, and one more meeting for Yellen

The Federal Reserve released the minutes of its mid-December meeting at which it raised its rate for the third time in 2017. The takeaways were that committee members were divided when it came to the number of hikes that would be made in 2018, and saw the tax cuts as providing a “modest boost” for economic growth. At the meeting, the Fed forecast another three rate hikes in 2018, but there was no consensus; six committee members expected two hikes or fewer, while four predicted at least four. As for the impact of the tax bill, the Fed raised its forecast for growth in 2018 to 2.5% from September’s 2.1%. The minutes also indicated that Fed members expected inflation to rise slowly as 2017 was the sixth year in a row that inflation has come in below the Fed’s target of 2%. The Fed’s Chairwoman Janet Yellen will preside at one more policy meeting at the end of January. She will step down as chair and leave the Fed when her term expires at the end of February, at which time she’ll be replaced at the helm by Jerome Powell once he’s confirmed by the Senate, seen as a formality.

Funding the government, again

By the end of next week, Congress will once again have to act to fund the federal government for fiscal 2018, with the latest stopgap extension due to expire on Jan. 19. The two parties chose to come to terms and not shut the government down before the Christmas break, but negotiations look to be more complicated now that President Trump has asked for a $33 billion package over 10 years to secure the border with Mexico, including $18 billion for a wall that the Democrats are dead-set against. Unlike the tax bill, the budget will require 60 votes to pass in the Senate, and the GOP’s majority was cut to 51-49 last week after Doug Jones (D, Alabama), was sworn in to replace the current Attorney General Jeff Sessions. Jones is the first Democratic senator from Alabama in 25 years.

Emerging Markets soar, Venezuela sinks

The combined market capitalization of Emerging Markets has climbed to a new high of $19.6 trillion, passing the previous record of $19.4 trillion reached in June 2015. What’s more, China has already added $200 billion in equity value in 2018, helping the sector to its best start of the year since 2004. But while the global economy improved last year, there were outliers, above all Venezuela, which have suffered from declining oil prices and political instability. Venezuela’s economy was at 16.5% in 2017 as inflation soared to a staggering 274%.

Auto sales retreat from the passing lane

After seven consecutive years of growth, vehicle sales finally dipped in 2017, down to 17.14 million from 2016’s 17.46 million, according to WardsAuto. Sales are expected to decline again in 2018, partly because interest rates are likely to rise, but also because there are a record 1.26 vehicles on the road right now for every licensed driver, according to Edmunds.com. Even so, sales have come a long way since the post-recession low in 2009, when they fell all the way to 11 million. In other news, the Institute for Supply Management (ISM) Manufacturing Index increased 1.5% in December to 59.7%, while the New Orders Index jumped from 64% to 69.4%. The ISM Non-Manufacturing Index rose to 57.4% in December from 55.9% the month before. Manufacturing in the eurozone capped off a strong year by rising to 60.6 in December, according to IHS Market, the highest reading since the survey began in 1997. United States factory orders were up for the fourth month in a row in November, rising 1.3% from October’s figure, which was revised from -0.1% to a gain of 0.4%. Orders for nondefense capital goods excluding aircraft fell 0.2%, while shipments of core capital goods declined 0.1%. Orders for durable goods increased 1.3% month over month, but orders for durable goods ex-transportation declined 0.1%. CoreLogic reported that housing prices were up 7% in November from a year earlier and 1% from October. Construction spending rose 0.8% in November from October’s upwardly revised gain of 0.9%. The trade balance was -$50.5 billion in November compared to a revised -$48.9 million in October. And first-time jobless claims for the week ending Dec. 30 were up 3,000 to 250,000; the four-week moving average rose 3,500 to 241,750.

A look ahead

This week’s updates will include the latest on consumer credit, small business optimism, wholesale inventories, the Producer and Consumer Price Indexes, retail sales and business inventories.