Arrow Created with Sketch. Market Commentary

Market Commentary, February 5, 2018 For the week of February 5, 2018

Key Market Data

01/26/2018 02/02/2018 One Week Change YTD One Year
S&P 500 Index 2,872.87 2,762.13 -3.85% +3.44% +23.53%
MSCI EAFE Index 2,184.49 2,123.82 -2.78% +3.63% +26.24%
Barclays Capital U.S. Aggregate Bond Index 2,026.96 2,009.11 -0.88% -1.82% +1.53%
10-year Treasury Note Rate 2.661% 2.842% +18.1 basis points +43.6 basis points +36.7 basis points

For the investors and analysts wondering what would finally bring an end to the stock market’s stellar start in 2018, the answer came in the form of a strong jobs report.

Already down for the week, the stock market had its worst day in two years Friday after the government said 200,000 jobs had been created in January and, more importantly, that wages had improved 2.9 percent over the past year, the biggest gain since 2009. That increase in wages could result in higher inflation, which could in turn lead to the Federal Reserve Bank (the Fed) raising its benchmark rate faster than expected. This could also mean that interest rates would increase faster than anticipated, which could put more pressure on equities given their lofty valuations. Add in some disappointing earnings reports and a decline in the price of oil – energy giants Exxon Mobil and Chevron both posted their worst one-day drops since 2011 Friday – and you end up with a rout, during which the Dow Jones Industrial Average shed 665.75 points, while the yield on the 10-year Treasury moved to its highest level since 2014. In addition, the CBOE’s Volatility Index, the VIX, jumped 25 percent Friday alone to close the week at its highest point since the 2016 election. However, as many market watchers noted, the major indexes remain well up, over the last year, even after Friday’s dip, and while investors may be skittish, the outlook for economic growth both here and abroad is generally seen as better than it’s been at any time since the end of the Great Recession.

Yellen signs off; Wells Fargo censured

The Fed met last week for the last time under the leadership of Chairwoman Janet Yellen, who stepped down after four years at the helm because President Donald Trump decided not to nominate her for a second term. She’ll go to work today at the Brookings Institution as a fellow in economic studies, following in the footsteps of her predecessor, Ben Bernanke. The Fed, as expected, left its benchmark rate unchanged at a range of 1.25 to 1.5 percent, but indicated that economic growth was “solid” and that “the stance of monetary policy remains accommodative.” The Fed is expected to raise its rate at least three times this year under new Chairman Jerome Powell. On Friday, Federal Reserve Bank of San Francisco President John Williams said that both three and four rate hikes in 2018 were “reasonable to think about as options.” On her last day on the job, Yellen and the Fed censured Wells Fargo for “widespread consumer abuses,” ordering the bank to remove four of its 14 board members and prohibiting it from exceeding its total asset size at the end of 2017, about $2 trillion, “until the firm makes significant improvements.”

Another shutdown?

The government is scheduled to run out of money for fiscal 2018 yet again this week, as the latest stopgap spending bill expires Thursday. In his first State of the Union address Tuesday night, President Trump called for a bipartisan effort to focus on the issues between the two parties. But, by all reports, the two sides haven’t made much headway in making a deal to keep the government open. In fact, after the GOP released a classified FBI report last week about the 2016 election, the two sides seemed to be further apart than ever.

A triumvirate to take on health care costs; record earnings for Amazon and Apple

In an effort to get a grip on health care costs – and as a sign of corporate frustration with the health care industry – Amazon, JP Morgan Chase and Berkshire Hathaway announced they would team up to form an independent health care provider for their employees, which number in the hundreds of thousands. Amazon was also in the news last week after its quarterly profit eclipsed $1 billion for the first time in the last three months of 2017, while Apple’s quarterly profit passed $20 billion, also a first.

Consumers spend more, save less

Personal spending rose 0.4 percent in December from November’s upwardly revised gain of 0.8 percent, while real spending climbed 0.3 percent and core spending, less food and energy, increased 0.2 percent. For the fourth quarter, spending rose 3.8 percent, the fastest clip in three years and well up from the third quarter’s 2.2 percent. Personal income advanced 0.4 percent. The government also said that the household savings rate fell to 2.4 percent in December, the slowest rate since 2005. The savings rate for all of 2017 was 3.4 percent, the lowest level since 2007, and down from 4.9 percent in 2016.

In other news, as noted, the economy added 200,000 jobs last month while the household unemployment rate remained at 4.1 percent, its lowest level since 2000. That extended the streak of job growth to a record 88 months in a row. Autodata said vehicle sales fell 1.2 percent in January from a year earlier as the annualized rate declined to 17.1 million from 17.4 in January 2017. Pending home sales were up 0.5 percent in December from November, but down 1.8 percent from December 2017. The S&P CoreLogic Case-Shiller Home Price Index rose 6.2 percent in November from a year earlier, with prices increasing month over month in all 20 cities tracked by the index. Construction spending improved 0.7 percent in December from the month before, the smallest gain in six years. The Institute for Supply Management’s Manufacturing Index for January fell from 59.3 percent in December to a still very strong 59.1 percent – any reading above 50 percent indicates expansion. Factory orders rose 1.7 percent in December from November, while orders ex-transportation improved 0.7 percent. Orders for durable goods climbed 2.8 percent, and orders for durable goods ex-transportation rose 0.7 percent. Orders for nondefense capital goods excluding aircraft fell 0.6 percent. The Conference Board Consumer Confidence Index for January improved to 125.4 from December’s 123.1. First-time jobless claims for the week ending Jan. 27 fell 1,000 to 230,000; the four-week moving average dipped 5,000 to 234,500. And Eurostat said that the eurozone’s economy expanded 0.6 percent in the fourth quarter, slightly less than the previous estimate of 0.7 percent, but still enough to add up to gross domestic product growth of 2.5 percent for all of 2017, the best showing in a decade.

A look ahead

This week’s short list of releases will include updates on the Institute for Supply Management’s Non-Manufacturing Index, the trade balance, consumer credit, wholesale inventories and consumer comfort.