Weekly Market Update
And it was a gift that just kept on giving because the Santa rally only lasted until the second trading day of the year, but the Dow closed out last week with back-to-back 200 point gains. The NASDAQ and the Russell 2000 are already up more than 5% for the year and the Dow and S&P 500 are up more than 4%. For the Dow, it eclipsed the previous fastest 1000 point Dow move of 24 trading days to get from 20k to 21k – we just did it in 23 days from 24k to 25k.
Basically, the year started as a turbo-charged version of 2017 with many of the same themes still present – technology, healthcare and financials. The energy sector (which was left for dead more than retailers) is leading the charge, up more than 7%, but this is all thanks to the high rally we have seen in oil prices. Crude oil has risen sharply over the past few months and now the International Energy Agency (IEA) is reporting that non-OPEC countries may increase output as oil is trading over $70 a barrel! You think?
Wall Street analysts who have been putting out their yearly forecast are generally in agreement – earnings growth and global growth should keep this bull market humming along, but with one caveat – keep an eye on interest rates. And I am!!
From March of 2017 – January 2018
2 year U.S. Treasury yield: 1.40% vs. 1.97%
10 year U.S. Treasury yield: 2.58% vs. 2.58%
30 year U.S. Treasury yield: 3.20% vs 2.92%
That is an unprecedented flattening of the yield curve, which I have mentioned all too often over the last 6 months. It’s something front and center on my radar.
STOCKS
So here we go – this is the earnings season everyone’s been looking for too, but it could be complicated to read the tea leaves, what with changes to taxes, financing, wages…a lot of unanswered questions. But, that’s the forward guidance and had no material impact on Q4 earnings.
Let’s get the bad out of the way early…poor Sears, they announced last week they would shut another 103 Sears and Kmart’s around the country. Things are looking so bad for them; JCPenney may put them out of business. But not Target. Target actually raised their guidance for the 4th quarter – stronger than expected holiday sales. And, according to the National Retail Federation (NRF), “During the holiday season, growing wages, stronger employment and high confidence led consumers to spend more than expected.” Actually, the jobs report was a whiff and wages were flat, BUT credit card usage hit a record.
Now for the good – the big banks reported and they, for the most part, did not disappoint. BlackRock, JP Morgan & PNC handily beat Wall Street’s estimates. But, there was some concern – JPM took a Q4 tax cut charge of $2.446BN, their profit slid 37%, hurt by charges from tax bill and they reported a loss of $143,000,000 MM margin loan loss to a SINGLE CLIENT – 1 CLIENT.
Now Wells Fargo was the exact opposite of these other banks, but the silver lining is that they saw a significant decline in fake accounts.
Probably one of the biggest stories last week was that Walmart will raise its starting wage rate for hourly employees in the U.S. to $11, expand maternity & parental leave benefits and provide a one-time cash bonus for eligible employees of as much as $1,000 due to tax reform. **NOTE** Walmart is the largest retailer in the world, so that’s BIG!!
ECONOMY
Federal Reserve officials expect reductions in corporate and personal taxes to provide boosts to consumer and business spending, though they remain somewhat unsure of how much impact the recently passed reform effort will have. However, the minutes released last Wednesday from the December Federal Open Market Committee (FOMC) meeting, “Committee members increased their expectations for 2018 GDP growth from 2.1% to 2.5%.” We’ll take what we can get!
Jobs or the lack thereof – last week’s jobs report showed the economy only added 148,000 in December versus expectations of 190,000. The unemployment rate held steady at 4.1%.
Inflation or the lack thereof – last week’s Producer Price index (PPI) showed no inflation at the wholesale level and the December headline Consumer Price index (CPI) was up 0.1%, but the core rounded up to 0.3%. Still, inflation remains very low. Over the last year, headline and core prices are up 2.1% and 1.8%, respectively.
Retail sales, which the NRF said was stronger than expected – well not so fast – Retail Sales up 0.4%, Est. 0.5%.
INTERNATIONAL
Across the pond, a number of reports and events to start out 2018 have analysts excited about Eurozone growth and that excitement is being felt through the stock markets across Europe; Germany, London, France, Italy and Spain.
The Euro-Area economic confidence reading soared to nearly a two-decade high.
The ECB minutes suggest a more hawkish shift in their monetary policy, which means growth is back and they may be letting their foot off the gas in the coming months.
Another significant turn of events last week; German lawmakers made a significant breakthrough in their talks to form a coalition government.
Across the other pond, the most significant happening was the announcement that North Korea and South Korea would hold military talks – talk about lowering the wall of worry – The North Koreans are wanting to start playing nice? That’s great news!!
THIS WEEK
This week, earnings will kick off in big fashion and it’s going to be mostly about the banking and financial companies, but we will also hear from a few others in healthcare and energy services.
On the economic calendar, industrial production/capacity utilization, housing starts and building permits and the University of Michigan’s consumer sentiment survey will highlight the week.
So, the markets have started with a bang for 2018, but let’s not get ahead of ourselves – as they say in golf, “it’s not how you drive, it’s how you arrive.”
So, stay tuned and we’ll keep you posted…
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
January 15, 2018
