Market Update: Monday, January 8, 2018

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Market Recap

  • Major U.S. indexes capped off week-long rally with strong gains despite lackluster payrolls data. S&P 500 Index +0.7%, Dow +0.9%, Nasdaq +0.8%, Russell 2000 +0.3%.
  • Technology stocks jumped +1.2% to lead sectors, energy, utilities finished slightly lower.
  • Breadth on NYSE (1.5:1), Nasdaq was positive (1.5:1); NYSE volume ~91% of 30-day avg.
  • Treasury yields mostly higher with some curve steepening; 10-yr. note +2 basis points (+0.02%) to 2.47%.
  • Commodities: WTI crude oil -0.7% to $61.56/bbl., COMEX gold flat at $1321/oz., industrial metals pulled back.
  • Economic data: Nonfarm payrolls headline reading came up short (148k vs. 190k), wage growth still tepid at +0.3% month over month (+2.5% year over year).

Overnight & This Morning

  • U.S. equities opened down slightly following strong previous week performance.
  • European stocks mostly higher, STOXX Europe 600 +0.2%, Germany DAX +0.3%, CAC 40 +0. 3%.
  • Asia finished in the green again. Global optimism still cited as driving theme. Shanghai Composite +0.5%, Hang Seng +0.3%.
  • Treasuries strengthened slightly; 10-yr. yield -1 basis point (0.01%) to 2.46%.
  • Commodities: Oil rising (+0.5%) to ~$61.71/bbl. Gold slightly lower (-0.1% to ~$1321/oz.), industrial metals mostly lower.
  • Economic releases: Eurozone economic sentiment figures came in above expectations (116 vs. 114.8).

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Key Insights

  • Economic data support positive outlook. As a reminder, we raised estimates for U.S. gross domestic product (GDP) growth as tax reform may likely boost both personal consumption and capital investment in the coming years. We believe this will also translate into higher corporate profits. Also supportive are recent economic data that paint an upbeat picture for 2018. 2017 ISM manufacturing data was the strongest in 13 years, and a recent LPL Financial study showed that the economy does not typically slip into recession until 45 months after a peak in manufacturing. While November orders for durable goods slightly missed expectations, the numbers improved markedly month over month, and core capital goods orders and shipments data in the final months of 2017 suggest that the positive “soft data” like business confidence readings are finally translating into “hard data” like orders and manufacturing. On the services side, the ISM Services Index, responsible for more than 80% of economic output, remains firmly in expansionary territory. We expect these trends to continue in 2018, particularly given full employment and incentives for capital investment.

Macro Notes

  • The return of volatility? We noted many times how historically non-volatile 2017 was for equities. From the S&P 500 not experiencing a single 3% pullback from peak to trough, to only having eight 1% daily changes all year. The first week of the year the S&P 500 gained 2.6%, which would have been the single largest weekly gain of 2017. Additionally, it snapped a 55 consecutive week streak without a 2% gain or loss. That was the longest such streak without a 2% change since the mid-1990s, and mid-1960s before that. Could this be the first clue that volatility is coming back in 2018?
  • This week’s economic data will be focused on inflation. In last month’s reading, the NFIB Small Business Optimism Index recorded near-record highs due to firms gaining confidence in the improving economy and newly signed tax reduction benefits. Tuesday we will see if this upward momentum continues before investors digest consumer and producer inflation data due out later in the week. Additional reports for the United States include the monthly budget statement, retail sales, and business inventories. In Europe, industrial production data for Germany, France, Italy, the United Kingdom, and the Eurozone are spread across the week. In addition: retail sales in the Eurozone & Italy, GDP for Germany and the United Kingdom, and France CPI data will be reported. In Asia, China CPI and PPI data comes in on Tuesday, and Japan’s Leading Index comes out on Wednesday. Additional Asian data includes: China imports & exports, trade balance for both China and Japan, and China foreign reserves close out the week on Saturday.
  • Charts to watch in 2018. To kick off 2018, over the coming weeks, we will cover some of the most important charts to look out for in 2018 on the LPL Research blog. Today, we take a look at global profits and show why the overall global economy continues to look strong. With the S&P 500, foreign developed markets, and emerging markets all sporting positive earnings growth last year for the first time since 2010, we continue to think the global bull market will last at least another year and there could be many opportunities to invest in areas outside of the United States as well.
  • In this week’s Weekly Market Commentary and Weekly Economic Commentary, due out later today, we will close the book on stocks and the economy for 2017 while tipping our caps to the strong start to 2018 by providing a high-level recap for 2017 that we think will be helpful for year-end client conversations. The commentaries will also summarize our equity market and economic views for 2018 following passage of the new tax law.
  • Four new highs to start 2018. The S&P 500 closed higher for the fourth straight day to kick off 2018, with all four days also making new highs. This is the longest win streak to start a new year since six in a row in 2010, while it is closing in on the all-time record of new highs to start a year of six in 1964. Not to be outdone, the S&P 500 is up 2.6% after four days, the best start to a year since 2003. Last, when the first five days of the year are up more than 2%, since 1950, the entire year has been higher 15 out of 15 times with an average return of 18.6%.

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Click Here for our detailed Weekly Economic Calendar

Monday

  • Consumer Credit (Nov)
  • Bostic (Dove)
  • Williams (Dove)
  • Rosengren (Hawk)
  • Germany: Factory Orders (Nov)
  • Eurozone: Consumer Confidence (Dec)
  • Eurozone: Retail Sales (Nov)
  • Bank of Canada: Business Outlook Survey (Q4)
  • BOJ: Outright Bond Purchase
  • China: Foreign Direct Investment (Dec)

Tuesday

Wednesday

  • MBA Mortgage Applications (Jan 5)
  • Import & Export Price Indexes (Dec)
  • Wholesale Inventories (Nov)
  • Evans (Dove)
  • Bullard (Dove)
  • France: Industrial Production (Nov)
  • UK: Industrial Production (Nov)
  • UK: Trade Balance (Nov)
  • UK: National Institute of Economic and Social Research GDP Estimate (Dec)
  • Bank of Italy: Monthly Report “Money & Banks”
  • BOJ: Outright Bond Purchase

Thursday

Friday

  • CPI (Dec)
  • Core CPI (Dec)
  • Retail Sales (Dec)
  • Business Inventories (Nov)
  • Rosengren (Hawk)
  • France: CPI (Dec)
  • Italy: Industrial Production (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.

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.

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