Weekly Market Update
2018 started off in an extraordinary fashion. The Dow and S&P had their best month since March 2016 and for the NASDAQ, it was the best month since October 2015.
As I said earlier in January, the year started off as a turbo edition of 2017 with the usual suspects leading the charge – technology, healthcare and consumer discretionary stocks.
And it wasn’t just here in the U.S. – stocks around the globe were in rally mode during January – Germany and Japan were on fire.
For stocks, this was the one earnings season that many have looked forward to as it is expected to be the best in years. The biggest concern has been the energy names, but with the rally in oil prices during the fall, a number of those concerns have subsided. So far, earnings growth is up better than 14% from a year earlier and still rising. Far more companies are beating estimates and they are doing it with wider margins than on average.
Most importantly, revenue growth has returned which means the gains are no longer coming from cost-cutting measures, but with real revenues. And the reflation trade, the bet on an expanding global economy can be seen in the guidance. Throw in the tax reform many will experience and they are saying it is the best of times.
And the economy – for many market participants, inflation has risen to the top of the wall of worry.
The housing market has been chugging along, but the lack of supply on the market has many concerned that the good numbers being put up could or should fade.
Manufacturing and industrial production are also pointing to an accelerating economy.
Q4 GDP headline number took a slight dip, but if you strip out hurricane-related impacts, the internals looks pretty strong.
The Federal Reserve upgraded their view on the current economic picture as well as upgraded their outlook and they widely expect tax reform measures to add to the gains.
On the jobs front, the economy added 200,000 new jobs in January – another solid number.
And finally, the index of leading economic indicators continues to signal strength ahead.
But that was January and right now, reading about January is like reading about George Washington and Abraham Lincoln…that’s history!!
Then last week – the markets woke up and took notice of something happening in the bond market. Bond yields rose to their highest level in years and it is spooking the stock market. Even a wash of better earnings could not prop up the market. The 10-year yield has risen from the mid 2.4% range at the beginning of 2018 and hit 2.85% last Friday following a good jobs report.
So coming off the best start to the year in a very long time and heading in February, the S&P 500 finished January and started February with its worst week since 2016 and the Dow the worst week in 2 years.
But we have to put that into some sort of perspective. The Dow is up nearly 40% since the Presidential elections in November 2016. Last week’s losses of 4% for the Dow don’t feel good because it has been so long since we experienced any sort of a pullback of 2%, much less 4%. So, we went from everything’s awesome to OMG! What’s going on?
What happened?
Earnings are great and the economy is doing fine and the geopolitical noise has subsided.
But –
With some names up 10% or even 20% YTD, you could expect to see some profit-taking.
Or, it could be with such a run up that those managers who do monthly rebalancing were going to have to sell a lot of stock and buy bonds.
Or it could be the huge spike in interest rates.
Nevertheless, it was one ugly week, one where we saw the Dow drop 666 points Friday and down 4.1% for the week.
So, what could really derail this bull market?
Well, Friday’s job report indicated that wages have grown 2.9% YoY, the strongest since 2009. While that is great for the American worker, it is causing some angst for traders.
The markets have not been freaked out by the notion of higher rates, but the velocity of the change in rates has been a bit too fast for traders. This will force many to rethink the number of rate increases from the FED (from 3 to 4), especially if they think the FED may be behind the curve and chasing Fiscal Policy.
Or, it could be a combination of all of these.
We’ll see!
Stay tuned and we’ll keep you posted…
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
February 5, 2018
