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Financial Markets Commentary For the week of January 29, 2018

Key Market Data

01/19/2018 01/26/2018 One Week Change YTD One Year
S&P 500 Index 2,810.30 2,872.87 +2.23% +7.55% +27.59%
MSCI EAFE Index 2,152.40 2,184.49 +1.49% +6.55% +29.61%
Barclays Capital U.S. Aggregate Bond Index 2,027.27 2,026.96 -0.02% -0.95% +2.66%
10-year Treasury Note Rate 2.660% 2.661% +0.1 basis points +25.5 basis points +15.6 basis points

Last week, the government shutdown ended after just three days. That news, along with a solid reading for fourth-quarter gross domestic product (GDP), helped to once again push the major indexes to new highs by end-of-day Friday. In fact, according to The Wall Street Journal, the S&P 500 has now notched 14 records in January, the most in a single month since 1955.

On the debit side, the stopgap measure to keep the government running only extends through Feb. 8, and the Republicans and Democrats seem no closer to an agreement. This means we may have another shutdown, or stopgap measure, on the near horizon. However, there’s also hope that the bipartisan group of senators that convinced its peers to reopen the government last week can also come up with a longer-range plan that both sides of the aisle will agree to. And President Donald Trump is expected to call for such a bipartisan effort Tuesday when he delivers his first State of the Union address.

President Trump at Davos

After the government reopened last week, President Trump headed to the World Economic Forum in Davos, Switzerland. There, he delivered a speech that declared an economically resurgent United States as “open for business.” He also said, “‘America First’ does not mean America alone,” and that he wanted to “affirm America’s friendship and partnership in building a better world.” In addition, the president said he was open to reconsider being part of the Trans-Pacific Partnership, the trade pact put together by former President Obama that’s moving ahead without the U. S. This came during a week in which the administration took protectionist steps that then-candidate Trump had championed by hitting imported washing-machines and solar panels, mostly from China and South Korea, with 50% tariffs. In addition, Treasury Secretary Steven Mnuchin had roiled Davos on Wednesday by inferring that the U. S. was happy to see the dollar weaken against other currencies as it boosted American exports. The next day, European Central Bank (ECB) President Mario Draghi pointedly responded by saying that International Monetary Fund (IMF) countries had pledged earlier this year to “refrain from competitive devaluations.” Then Friday, Mnuchin said his comments had been taken out of context and were “in no way any intention to violate the commitment that we’re not trying to intervene in currency markets.”

U.S. GDP posts its best year since 2014

The government’s first estimate for fourth-quarter GDP came in at 2.6%. That was below the forecast of 2.9%, but rising business investment and decreasing inventories are another sign that America’s economy is on the upswing, along with stronger corporate earnings and the impact of the recent tax cuts. For all of 2017, the economy expanded 2.3%, held back because of a weak first-quarter reading of 1.2%, but still the best year since 2014. Consumer spending gained 3.8% for the final quarter, the strongest gain since 2014. Spending on durable goods jumped 14.2%, the highest rate since 2009. The Federal Reserve forecasts growth of 2.5% in 2018.

Global growth accelerates even faster

In a sign of renewed global growth, the IMF reported that worldwide GDP advanced 3.7% in 2017, the fastest pace since 2011. IMF’s estimates for expansion in both 2018 and 2019 were revised up from 3.7% to 3.9%.

Changing of the guard at the Fed

As expected, the Senate confirmed Jerome Powell as the new chairman of the Fed last week by a tally of 84-to-13. Powell is widely expected to “stay the course,” having voted in favor of every policy initiative since he joined the Fed in 2012. His predecessor Janet Yellen will chair her last meeting this Tuesday and Wednesday, and then leave the Fed when her term as its leader ends on Feb. 3.

From bad to worse in Puerto Rico

Puerto Rico said it wouldn’t be able to pay off any of its $70 billion debt for at least five years because of the damage inflicted by Hurricanes Irma and Maria. Governor Ricardo Rosselló had hoped to pay creditors $3.6 billion through 2022, but that plan has now been shelved. He’s also hoping to get $94.4 billion in disaster aid, well above what Congress had planned to provide. Overall, the latest estimate shows the island’s GDP having contracted 11.2% in 2017.

The ECB stands pat

Thursday, the ECB left its policies unchanged despite the eurozone’s economic rebound. The bank said it would continue its stimulus spending of €30 billion a month at least through September to push inflation toward the bank’s target of 2% and also to keep interest rates low.

Q4 earnings update

The fourth-quarter earnings season is still underway but, so far – with 133 of the S&P 500 companies having reported – 81% have beat expectations, according to Bloomberg, and earnings are up 10.8% from a year earlier. In other news, existing home sales fell 3.6% in December from November to 5.57 million. New home sales plunged 9.3% in December from November to 625,000 but were nonetheless up 14.1% from a year earlier. For all of 2017, 608,000 new homes were sold, up 8.3% from 2016. And first-time jobless claims for the week ending Jan. 20 rose 17,000 to 233,000; the four-week moving average declined 3,500 to 240,000.

A look ahead

This week’s long list of releases will include the latest on personal income and spending, the S&P CoreLogic Case-Shiller Home Price Index, pending home sales, consumer confidence, nonfarm productivity, construction spending, the Institute for Supply Management’s Manufacturing Index, orders for factory, durable, and capital goods, and the unemployment report for January, with the jobless rate expected to remain unchanged at 4.1%. And, as noted, the Fed will meet Jan. 30 and 31.