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Financial Markets Commentary For the week of January 16, 2018

Key Market Data

01/05/2018 01/12/2018 One Week Change YTD One Year
S&P 500 Index 2,743.15 2,786.24 +1.57% +4.28% +25.18%
MSCI EAFE Index 2,100.91 2,126.10 +1.20% +3.68% +27.41%
Barclays Capital U.S. Aggregate Bond Index 2,039.83 2,036.17 -0.18% -0.50% +2.53%
10-year Treasury Note Rate 2.477% 2.548% +7.1 basis points +14.2 basis points +18.4 basis points

Anyone for 26,000?

The Dow passed 25,000 less than two weeks ago, but, given the leaps and bounds the index took last week, it could hit that next milestone soon, as it added 507 points to close at 25,803.19. And, once again, the Dow Jones Industrial Average wasn’t alone in setting record after record, with the S&P 500, the Nasdaq and the Russell 2000 Index of small company stocks also having now ended each of the first two weeks of 2018 at new highs. In fact, there has only been one day so far this year, last Wednesday, when the S&P 500 did not notch a record.

The stock market’s meteoric run in 2018, coming off the unexpectedly strong returns in 2017, has been driven by rising investor confidence. That confidence has in turn been propelled by positive economic news, the recent tax cuts and high expectations for fourth-quarter corporate earnings, which began last week on a largely upbeat note. At the same time, concern about rising interest rates – a factor in Wednesday’s downturn – has pushed the yield on the 10-year Treasury to its highest point since March, while the yield on the 2-year note closed over 2% for the first time since 2008.

The dipping dollar and the rising euro

Despite the recent signs of economic strength in the United States, the dollar dipped to its lowest level since 2014 last week, as measured by the ICE Dollar Index. The reason was that some investors turned to the euro, as growth in the eurozone suddenly seemed an even better prospect. The euro rose to a three-year high against the dollar last week after the European Central Bank indicated it may end its bond purchasing sooner than expected, a sign that the region’s economy is rebounding. In addition, fourth-quarter gross domestic product for the eurozone was revised up from the original reading of 0.6% to 0.7%, and growth for last year is now expected to come in at 2.4%, which would be the best year-over-year showing since 2007. In addition, it looks as if Germany’s Angela Merkel has finally brokered a governing coalition after her party lost seats in September’s election, meaning that she will return as chancellor for the fourth time. And the European Commission reported that sentiment in the eurozone closed 2017 at 116, the highest reading since December 2000.

A shutdown looming?

After more than one stopgap extension, the Republicans and Democrats have yet to agree on a plan to fund the government for fiscal 2018, with the latest extension due to expire on Friday. Both sides are anxious to avoid a shutdown, but as this week began, they remained far apart on key issues, including immigration and funding for a border wall with Mexico. Unlike the recent tax bill, the GOP needs votes from across the aisle to pass the budget.

China’s problematic new record

President Donald Trump has yet to follow through on his campaign pledge to get tough with China on trade, but the latest news about that nation’s trade surplus with the U.S. may provide a new impetus for action. According to the Chinese government, China set a new record for the size of its trade surplus with the U.S. in 2017 at $275.8 billion, up 10% from the year before.

The year in weather

2017 was a rough year for Americans, and for reinsurance companies, as “extreme weather events” caused $306 billion in damages, according to the National Oceanographic and Atmospheric Administration. Last year there were 16 natural disasters that caused more than $1 billion in damage, including Hurricane Harvey ($125 billion), Hurricane Maria ($90 billion) and Hurricane Irma ($50 billion), followed on the list by the California wildfires ($18 billion).

Inflation ticks up

In other news, some analysts are beginning to think that the Federal Reserve’s outgoing Chairwoman Janet Yellen may have been right after all, and that inflation is beginning to come around. The Labor Department said that consumer prices were up 0.1% in December from November, and 2.1% over the past year. But the closely watched core prices, less food and energy, climbed 0.3% and were up 1.8% from a year earlier. If inflation continues to close in on the Fed’s target of 2%, it would be seen as a greenlight for the Fed to raise its rate three times in 2018. The Producer Price Index fell 0.1% in December from the month before, its first decline since August 2016, and was up 2.6% over the past year. Core PPI rose 0.1% month over month and 2.3% for the previous 12 months.

In other news, the government said that retail sales increased 0.4% in December from the month before and were up 5.4% from a year earlier. For all of 2017, sales were up 4.2% compared to a year-over-year gain of 3.2% in 2016. Small business optimism declined in December to 104.9 from November’s 107.5, according to the National Federation of Independent Business. However, the index’s monthly average in 2017 hit a new high of 104.8, edging the previous record of 104.6 set in 2004. The Fed reported that the annual rate of consumer credit rose 8.8% in November to $3.827 trillion from the month before, with the increase of $28 billion being the largest advance since November 2001. The Bureau of Labor Statistics said the number of job openings on the last business day of November was 5.9 million, essentially unchanged from the month before, though the number of openings was up 4.4% from a year earlier. And first-time jobless claims for the week ending Jan. 6 rose 11,000 to 261,000; the four-week moving average climbed 4,000 to 250,750.

A look ahead

This holiday-shortened week will see updates on industrial production and capacity utilization, housing starts and building permits, consumer confidence and the Fed’s Beige Book report on its 12 districts. There will also be more fourth-quarter earnings news and, as noted, Congress will work to avoid a government shutdown on Friday.