Market Update: Tuesday, January 2, 2018

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Market Recap

  • U.S. equities fall on final trading day of 2017. Dow (-0.5%), S&P 500 Index (-0.5%), Nasdaq (-0.7%), Russell 2000 (-0.9%) lower in uneventful session.
  • Utilities led despite flat performance. Remaining sectors all fell with telecommunications (-0.9%) the laggard.
  • Breadth on NYSE (1.4:1), Nasdaq (1.8:1) negative, NYSE trade volume ~79% of 30-day avg.
  • Treasuries mixed with 10-yr. yield -2 basis points (0.02%) to 2.41%; U.S. dollar weaker vs. major currencies.
  • Commodities: WTI crude oil +0.5% to $60.12/bbl., COMEX gold +0.6% to $1305/oz., industrial metals mostly higher.

Overnight & This Morning

  • Major indexes opened higher; light volume expected as traders return from the New Year’s holiday.
  • Europe mostly lower; weighed down by weakness in autos, mining shares; STOXX Europe 600 -0.5%, DAX -0.8%, FTSE 100 -0.4%. Strong Euro-area Markit Purchasing Managers’ Index (PMI) at 60.6.
  • Asia higher overnight. Shanghai Composite +1.2%, Hang Seng +2.0%, Japan closed for holiday. China Caixin manufacturing PMI for December (51.5 vs. 50.8 in November) better than expected.
  • Treasuries weaker; 10-yr. yield +5 basis points (0.05%) to 2.46%.
  • Commodities: Oil (-0.2%) to $60.30/bbl., gold +0.6% to $1310/oz., an eighth straight day of gains as dollar weakness continues. Record low U.S. temps boosting natural gas.
  • Today’s economic calendar includes Markit “flash” U.S. manufacturing PMI.

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Macro Notes

  • U.S. economy is expected to remain strong going into 2018. The ISM manufacturing data, which has been trending higher since November 2016, is due out on Wednesday, and non-manufacturing data is scheduled to release on Friday. The consensus estimate is for manufacturing to be in line with November’s print at 58.2. On Wednesday, readers will look for clues within the Federal Open Market Committee’s (FOMC) minutes on what could potentially push the FOMC toward a more hawkish calibration in 2018. On Friday, the all-important jobs data will come out, led by the December Nonfarm Payrolls report with the consensus estimate at 185K. In Europe, Manufacturing & Services PMI data are due for the Eurozone, Italy, France, Germany, and the United Kingdom. CPI inflation data for both the Eurozone and France are due out on Friday. In Asia, China’s manufacturing PMI data comes out this week and the consensus forecast (50.7) is slightly lower than the 50.8 print in November; however, still in expansionary territory.
  • Here comes 2018. The kick off of a new year brings with it many questions. One such question is: Does the first trading day of the year tell us anything about what the full year might do? Although we wouldn’t put much faith in what happens during the first trading day, and instead would focus on fundamentals, valuations, and technicals, recent history has been quite interesting. We will take a closer look on the LPL Research blog later today.
  • We are revising 2018 growth expectations upward 0.25-0.50%. In light of the rapid passage of the Tax Cuts and Jobs Acts, which President Trump signed into law on December 22, we are revising our 2018 outlook for U.S. gross domestic product (GDP) growth upward from 2.5% to 2.75-3.0%. We believe that early passage of the bill compared to expectations when we wrote our Outlook 2018 will accelerate the impact on consumer and business behavior, helping to sustain strong consumer spending and support improved business spending. The impact on the deficit remains a longer term concern, but we expect at least 1/3 of the cost of the bill will be offset by tax revenue from improved economic growth and possibly more. Read more about the impact of the tax bill on the economy in this week’s Weekly Economic Commentary.
  • Stock market outlook (as of 1/2/18). As discussed in our latest Timely Topics, the reduction of the corporate tax rate combined with businesses’ ability to fully expense their capital expenditures for the next five years are powerful tailwinds for profits, which have already enjoyed a renaissance in 2017. We believe this will help elongate the expansion, which has thus far been powered by the U.S. consumer. Going forward, we look for business investment and further gains in corporate earnings per share (EPS) to power the economy and equity markets. As a result, we have raised our operating earnings forecast for companies in the S&P 500 by $5.00 per share, from $142.50 to $147.50 in 2018. Assuming a trailing 12-month PE of 19-20, we believe the S&P 500 would be fairly valued in the range of 2,850-2,900 by year-end 2018, a move of approximately 8% from current levels, not including dividends. This week’s Weekly Market Commentary, due out later today, is taken from last week’s tax implications report.
  • Fixed income outlook (as of 1/2/18). Given our outlook for the economy, Federal Reserve (Fed) policy, and the potential for fiscal stimulus, and 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 in 2018. Moderate GDP growth and rising inflation may lead to gradually higher interest rates, limiting bond returns. 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. Note that we have made no change to our 2018 fixed income forecasts as a result of tax reform. Our latest Bond Market Perspectives is taken from last week’s tax implications report.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • Markit Manufacturing PMI
  • Germany: Retail Sales (Nov)
  • France: Markit France Manufacturing PMI (Dec)
  • Germany: Markit Germany Manufacturing PMI (Dec)
  • UK: Markit UK Manufacturing PMI (Dec)
  • Eurozone: Markit Eurozone Manufacturing PMI (Dec)

Wednesday

Thursday

  • Challenger Job Cuts (Dec)
  • Weekly Jobless Claims (Dec 30)
  • Markit Services PMI (Dec)
  • Bullard (Dove)
  • France: Markit France Services PMI (Dec)
  • Germany: Markit Germany Services PMI (Dec)
  • UK: Markit UK Services PMI (Dec)
  • Eurozone: Markit Eurozone Services PMI (Dec)
  • UK: Money Supply & Bank Lending (Nov)
  • Japan: Monetary Base (Dec)
  • Japan: Nikkei Japan Services PMI (Dec)

Friday

  • Change in Nonfarm, Private & Manufacturing Payrolls (Dec)
  • Unemployment Rate (Dec)
  • Average Hourly Earnings (Dec)
  • Average Weekly Hours (Dec)
  • Labor Force Participation & Underemployment Rates (Dec)
  • Trade Balance
  • Factory Orders (Nov)
  • ISM Non-Manufacturing (Dec)
  • Durable Goods Orders
  • Cap Goods Shipments & Orders

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.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

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.

This research material has been prepared by LPL Financial LLC.

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