Market Update: Thursday, January 18, 2018

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Market Recap

  • Major indexes finished broadly higher. Focus returned to positive fundamental backdrop; Dow +1.3%, S&P 500 Index +1.0%, Nasdaq +1.0%.
  • All sectors gained; technology, consumer staples led advance. Telecommunications, consumer discretionary lagged.
  • Positive market breadth (NYSE 1.8:1, Nasdaq 1.9:1), volume remained elevated (~117% of 30-day avg.).
  • Treasury yields rose amid risk-on trading; 10-yr. yield +4 basis points (+0.04%) to 2.57%.
  • Commodities: WTI crude oil held near flat (+0.3% to $63.91/bbl.), COMEX gold softened -0.6% to $1329/oz., industrial metals mostly higher.
  • Economic data: Bank of Canada increased its target for the overnight rate to 1.25 percent, as expected.

Overnight & This Morning

  • U.S. equities opened slightly higher, continuing ascent after yesterday’s strong performance.
  • European stocks mixed in midday trading, markets following Wall Street higher. STOXX Europe 600 +0.1%, DAX +0.4%, FTSE 100 -0.3%.
  • Asian markets mostly higher as well, follows positive gross domestic product (GDP) figures from China, Japan the notable underperformer. Nikkei -0.4%, Hang Seng +0.4%, Shanghai Composite +0.9%.
  • Treasury yields continue ascent; 10-yr. yield +4 basis points (+0.04%) to 2.61%.
  • Commodities: Oil slightly higher (+0.1% to ~$64.05/bbl.), gold flat at ~$1329/oz., industrial metals slightly higher across the board.
  • Economic releases: Housing starts, initial jobless claims (220K vs. 249K consensus), Philly Fed Index, weekly oil inventories on tap. Claims were lowest since 1973 and probably impacted by holidays. Chinese industrial production figures strong as well, month-over-month growth picked up to 0.52% from 0.47%.

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Macro Notes

  • Earnings season off to a good start. Of the 36 S&P 500 companies that have reported results through January 17, 78% have reported earnings above estimates, while even more impressively, 81% have surpassed revenue targets (Thomson Reuters data). The amount of upside to overall fourth quarter earnings for the S&P 500 has been limited thus far, but we expect this season to be a good one. We will discuss in greater detail in our latest LPL Research blog, due out at 12 p.m. ET today.
  • More milestones for the bull market. Wednesday’s gains pushed the Nasdaq over its inflation-adjusted March 2000 highs for the first time in 17 years. Meanwhile, the Dow completed another 1000-point advance in a record nine trading days–the previous record was 23 trading days from 24,000-25,000 through January 4, 2018. The records keep piling up but we continue to see further, though possibly modest, gains for stocks over the balance of the year, even if volatility picks up as we expect.
  • Tomorrow’s government funding deadline is fast approaching. We continue to watch the flurry of headlines out of Washington, D.C. regarding tomorrow’s deadline to fund the government and avoid a shutdown. We still believe a shutdown is unlikely and that the two parties are–despite some reports to the contrary–fairly close to an agreement on a stopgap one-month extension. Neither party wants to take blame for an impasse.
  • Oil remains well supported. Oil is holding near $64 a barrel on strong demand, compliance for OPEC production caps, and geopolitical risk. We believe sustaining prices much above these levels will prove difficult given the potential surge in U.S. shale output, and potentially higher OPEC output, as producers look to take advantage of higher prices.
  • Continue to favor EM equities. China’s solid economic performance provides more evidence of the favorable economic growth outlook in emerging markets (EM) broadly. The Chinese economy, which grew 6.9% for the year, accelerated for the first time since 2010. Fourth quarter GDP (+6.8% annualized) beat expectations on strong industrial output and capital investment. Consensus expects slightly slower growth in 2018 as the Chinese government manages its mix of growth and its debt problem. However, the strong global economy, including acceleration in the U.S., positions EM broadly to potentially accelerate growth in 2018 to near 5% from 4.5% in 2017.

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Thursday

Friday

  • U. of Michigan Sentiment (Jan)

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

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