Market Commentary

Financial Markets Commentary For the week of January 22, 2018

Key Market Data

01/12/2018 01/19/2018 One Week Change YTD One Year
S&P 500 Index 2,786.24 2,810.30 +0.86% +5.20% +26.63%
MSCI EAFE Index 2,126.10 2,152.40 +1.24% +4.97% +29.74%
Barclays Capital U.S. Aggregate Bond Index 2,036.17 2,027.27 -0.44% -0.93% +2.58%
10-year Treasury Note Rate 2.548% 2.660% +11.2 basis points +25.4 basis points +18.5 basis points

And now for the finger-pointing.

Saturday at 12:01 a.m., the federal government shut down after the Senate rejected a stopgap spending bill that would have kept it running through Feb. 16. This came despite a meeting Friday afternoon between President Donald Trump and the Senate Minority Leader Chuck Schumer (D, New York), to try to cut a deal to keep the government open. The two sides have been struggling to come to terms on several issues, including the fate of young immigrants already in the United States and regulations for new immigrants hoping to come here.

It was the first time the government has been shut down since 2013 when the GOP tried to force former President Barack Obama to defund the Affordable Care Act, to no avail. And, not surprisingly, once the votes in the Senate had been counted, both sides rushed to blame the other for the impasse. The president accused the Democrats of timing the vote to tarnish the one-year anniversary of his having taken office. The Senate Majority Leader Mitch McConnell (R, Kentucky) described it as “an unfortunate hostage situation,” and the Speaker of the House Paul Ryan (R, Wisconsin), blamed Democrats for a “reckless shutdown.” (The House passed the measure on Thursday.) The Democrats, for their part, claimed they were only using the same tactics that the GOP had used when Obama was in office, and Schumer said he and his party had “bent over backward to negotiate with the White House.” The Democrats also pointed out that it was the first time the government has been shut down when both the White House and Congress have been controlled by the same party. Many agencies will remain open and some, such as the Department of Homeland Security, are exempt from closure. Negotiations continued over the weekend, and a bipartisan group of 20 senators is working on an interim solution with a shorter timeframe, perhaps two weeks.

Despite the looming threat of a shutdown Friday, stocks continued their 2018 run, with the S&P 500, Nasdaq and Russell 2000 all hitting new highs. As for the numbers, the Dow Jones Industrial Average closed above 26,000 last week (it passed 25,000 on Jan. 4), and the S&P 500 passed 2,800. As for bonds, the combination of a strong economy and the prospect of higher interest rates pushed the yield on the 10-year Treasury to its highest level since July 2014.

Given those numbers, it’s not surprising that the latest Wall Street Journal/NBC News poll showed that the satisfaction of Americans in the economy has reached a 17-year high at 69%. Better still, the satisfaction was across party lines, with 86% of Republicans feeling that way, along with 65% of Independents and 57% of Democrats. In addition, the number of respondents who thought the tax bill was a good idea rose to 30% from 24% in December.

The new No. 2

The U.S. is projected to pass Saudi Arabia in oil production this year; partly because of accelerated shale output, and partly because Saudi Arabia has reduced its production as part of the Organization of the Petroleum Exporting Countries’ plan to raise the price of oil. U.S. output, according to the International Energy Agency, will rise to 10.4 million barrels a day this year, which would pass Saudi Arabia and make the U.S. No. 2 in production behind Russia.

Apple and the tax cut

Apple, which has been criticized for stashing the proceeds of its foreign earnings abroad, is planning to shift most of that $252 billion back to the U.S. and invest it here. The move is the result of the recently passed tax bill which allows for a one-time repatriation of corporate cash held abroad at a lower tax rate than under the previous law. Because of the move, Apple will pay $38 billion in taxes, the largest payment of its kind ever made.

China’s GDP

China reported that its gross domestic product (GDP) rose in 2017 for the first time since 2010, but the Chinese government’s math can be opaque and there’s question as to the accuracy of the numbers. Driven by exports, construction and retail sales, the government said that growth rose from 6.7% in 2016 to 6.9% in 2017, but some analysts thought the figure was higher.

In other news, the Federal Reserve said that industrial production was up 0.9% in December from November, though manufacturing output only increased 0.1%. For the fourth quarter, total industrial production soared 8.2% on an annualized basis, roaring back after being held in check in the third quarter by the hurricanes. In addition, the index is up 3.6% from December 2016, its largest year-over-year gain since 2014. Capacity utilization was 77.9% compared to 77.2% the month before. Housing starts were down 8.2% in December from November to an annualized rate of 1.19 million. Starts were off 6% from a year earlier. Building permits fell 0.1% to an annualized rate of 1.30 million, up 2.8% from December 2016. The University of Michigan’s Consumer Sentiment Index fell for the third month in a row, down to 94.4 in early January from 95.9 in December. Another survey by the University of Michigan showed that confidence in the Fed remains soft a decade after the Great Recession, with 38% of those polled saying they were less confident in the central bank than five years earlier, compared to figures of 41% in 2015 and 59% in 2011. In the Fed’s Beige Book report, all 12 districts reported “modest to moderate” gains. And first-time jobless claims for the week ending Jan. 13 fell 41,000 to 220,000, the lowest level since February 1973. The four-week moving average dropped 6,250 to 244,500.

A look ahead

This week’s updates will include the latest on existing and new home sales, wholesale and retail inventories, orders for durable and capital goods, the Conference Board’s leading economic indicators and the government’s first estimate for fourth-quarter growth, expected to come in at 2.9% after 3.2% in the third quarter. Note: Some of the government’s releases may be delayed if the shutdown continues.