Market Update: Monday, November 27, 2017

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Market Recap

  • Major U.S. indexes up on Friday and for the week. Relatively quiet week that saw indexes hit fresh record closes Tuesday. S&P 500 Index +0.2%, Dow +0.1%, Nasdaq +0.3%.
  • Technology led; telecommunications, financials lagged.
  • Positive breadth amid very low volume (~40% of 30-day avg.).
  • 10-year note yield +2 basis points (+0.02%) to 2.34%.
  • Commodities – WTI crude oil +1.4% to $58.84/bbl., COMEX gold -0.4% to $1288/oz. despite dollar weakness.
  • Busy week ahead. Powell confirmation hearing, Yellen monetary policy testimony, President Trump meets with congressional leaders on government funding, October PCE inflation and November global PMI data, OPEC meeting, and expected Senate vote on its tax overhaul bill.

Overnight & This Morning

  • Domestic stocks near flat ahead of busy week of economic data, Washington news flow.
  • European equities mostly lower midday (STOXX Europe 600 -0.1%), following negative session for Asia stocks overnight. Rising bond yields, easing growth in industrial profit in mainland China cited as key drivers. Shanghai Composite -1.0%, Hang Seng -0.6%. Nikkei -0.2% in quiet trading.
  • Commodities – Crude pulling back (-1.7% to $57.98/bbl.) after strong week, gold +0.6% to $1294/oz. amid cautious trading, industrial metals mixed.
  • 10-year note yield flat at 2.34%.
  • Economic data – New home sales, Dallas Fed Manufacturing Index slated for today.

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Key Insights

    • Outlook 2018. It’s here! LPL Research proudly presents Outlook 2018: Return of the Business Cycle, complete with insightful commentary, and economic and market guidance for 2018. Download your copy now, or order print copies on Marketing On Demand (MOD). Visit the Resource Center | Your Business | Marketing | Marketing On Demand; discounted rate available through Cyber Monday.

A summary of our views is as follows:

    • We look for the global economy to expand at a healthy rate of about 3.7% in 2018 thanks to a reboot in the policy, economic, and investment decisions across developed and emerging markets. In developed markets, where monetary policy has a global impact, fiscal steps can now be taken to spur growth and extend the duration of the expansion. Meanwhile, most emerging economies continue to draw investors in, as others come out of recession.
    • In the U.S., we project real gross domestic product (GDP) growth of around 2.5% as monetary tailwinds give way to fiscal support, whether in the form of government spending, tax cuts, or deregulation. As the Federal Reserve (Fed) pulls back and fiscal policy steps in, businesses that want to succeed will be forced to increase market share and secure their future success by increasing capital expenditures and investing in property, plants, and equipment. Though consumer spending will remain the largest component of GDP, we look for business spending to have the highest growth trajectory in 2018.
      • Fixed Income. Given our outlook for the economy, Fed policy, and the potential for fiscal stimulus, we expect the fixed income market to be under pressure in the coming year. Given our expectations for a gradual pickup in interest rates across the yield curve, we expect flat to low-single-digit returns for the Bloomberg Barclays U.S. Aggregate Bond Index. Moderate GDP growth and rising inflation may lead to gradually higher interest rates, limiting bond returns. That said, bonds remain an important element of a well-balanced portfolio, serving to help mitigate portfolio risk should we experience equity market pullbacks.
      • We expect high-quality fixed income to remain under moderate pressure in 2018, amid gradually increasing interest rates across the yield curve. Two to three additional Fed rate hikes will likely pressure short-term interest rates higher, while increasing levels of growth and inflation push long-term interest rates higher. We expect the 10-year Treasury yield to end 2018 in the 2.75-3.25% range.
      • Equities. The return of the business cycle means that earnings growth may have to shoulder most, if not all, of the load if stocks are going to produce attractive returns in 2018. After three straight years (2014-2016) of basically flat S&P 500 Index operating earnings, at around $118 per share, consensus estimates project $131 earnings per share for 2017 and $146 per share for 2018. Earnings are supported by better global economic growth, including a pickup in business spending and robust manufacturing activity, normalized inflation (near 2%), and stable operating margins, even with some modest wage and other input cost pressures.
      • Our 8-10% S&P 500 earnings growth forecast for 2018 and a target PE of 19 drive our 2018 year-end target of 2725-2750 for the S&P 500 and total return forecast of 8-10% (including dividends). Risks to our stock market forecast include Congress failing to pass a tax agreement or a potential policy mistake by a central bank

Macro Notes

  • Usual outsized focus on GOP tax overhaul push ahead of Senate vote late this week. Washington Post discussed how Senate leadership considering changes to win over some holdouts, but also highlighted lack of wiggle room due to fiscal constraints. Axios flagged concerns surrounding three Republicans (Corker, McCain and Flake) worried about deficit, not beholden to Senate leadership and who would not mind sticking it to Trump. (Source: FactSet)
  • A few other headlines in focus. Sell-side and press reports discussed a fairly upbeat start to the holiday season with retailers helped by cleaner inventory positions. Also some additional attention on the heightened inflation uncertainty at the Fed. While taxes continue to dominate headlines out of Washington, press also increasingly focused on a busy December with all of the complications surrounding a budget funding deal. (Source: FactSet)
  • Good start to holiday shopping season. Sell-side and press reports have largely highlighted a positive start to the holiday shopping season. According to Adobe Analytics, online sales on Thanksgiving Day and Black Friday rose 17.9% to ~$7.9B. Online sales on Black Friday alone increased nearly 16% to a record $5B. Cyber Monday sales are estimated up 16.5% to a record $6.6B. In addition, according to ShopperTrak, Black Friday traffic at retailers was down by <1%, which analysts noted was better than feared. Both the WSJ (“Black Friday Kicks Off, With Upbeat Shoppers and Fewer Discounts”) and Bloomberg (“With Expectations Low, Retailers See Victory on Black Friday”) discussed how retailers entered the holiday shopping season with pared-down inventories, a dynamic that left them in better shape from a promotional perspective. The former noted that according to price-tracking firm Market Track LLC, the average Black Friday advertised discount across 17 categories was 45% this year compared with 48% last year. It added that only three of eight major retailers offered deeper discounts than they did a year ago. More seasonal weather was cited as another tailwind for retailers, while reports also discussed the tight labor market, firmer wages and upbeat consumer confidence. However, there were some concerns that momentum may now fade as consumers wait until just before Christmas for better deals. (Source: FactSet).

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Click Here for our detailed Weekly Economic Calendar

Monday

Tuesday

  • Wholesale Inventories (Oct)
  • Case-Shiller Home Price Index (Sep)
  • Consumer Confidence (Nov)
  • Richmond Fed Mfg. Report (Nov)
  • Eurozone: Money Supply (Oct)
  • Eurozone: Organisation for Economic Co-operation & Development Economic Outlook
  • Bank of Canada:  Poloz
  • Japan: Retail Sales (Oct)

Wednesday

  • GDP (Q3)
  • PCE (Q3)
  • Beige Book
  • Yellen (Dove)
  • France: GDP (Q3)
  • Germany: CPI (Nov)
  • Eurozone: Consumer Confidence (Nov)
  • BOJ: Nakaso, Iwata, Harada
  • Japan: Industrial Production (Oct)
  • Japan: Vehicle Production (Oct)
  • China: Mfg. & Non-Mfg. PMI (Nov)

Thursday

  • Personal Income & Spending (Oct)
  • Core PCE (Oct)
  • Chicago PMI (Nov)
  • France: CPI (Nov)
  • Eurozone: Unemployment Rate (Oct)
  • Italy: CPI (Nov)
  • India: GDP (Q3)
  • South Korea: GDP (Q3)
  • Japan: CPI (Oct)
  • Japan: Nikkei Japan Mfg. PMI (Nov)
  • China: Caixin China Mfg. PMI (Nov)

Friday

  • Markit Mfg. PMI (Nov)
  • Construction Spending (Oct)
  • Germany: Import Price Index (Oct)
  • Italy: Markit/ ADACI Italy Mfg. PMI (Nov)
  • France: Markit France Mfg. PMI (Nov)
  • Germany: Markit Germany Mfg. PMI (Nov)
  • Italy: GDP (Q3)
  • Eurozone: Markit Eurozone Mfg. PMI (Nov)
  • UK: Markit UK Mfg. PMI (Nov)
  • Brazil: GDP (Q3)
  • Canada: GDP (Sep)
  • Japan: Vehicle Sales (Nov)

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

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