Market Update: Monday, January 22, 2018

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Market Recap

  • Stocks pushed higher; Russell 2000 (+1.3%) hit fresh record high as investors shrugged off debt ceiling stalemate in Washington. S&P 500 +0.4%, Dow +0.2%, Nasdaq +0.6%.
  • Consumer sectors and bank stocks led; rate-sensitive utilities trailed on rising Treasury yields.
  • NYSE breadth positive (2.0:1) amid above-avg. volume (~133% of 30-day avg.).
  • Treasuries fell across the curve; 10-yr. yield +3 basis points (+0.03%) to 2.66%.
  • Commodities: WTI crude oil -1.0%, COMEX gold +0.4% to $1332/oz., industrial metals mostly higher.

Overnight & This Morning

  • Major indexes open near flat as earnings season heats up, Senate vote on debt ceiling looms (~noon vote).
  • European stocks higher midday; sentiment boosted by a positive outcome in Germany as Social Democratic Party voted to enter coalition talks with Chancellor Markel’s conservative party, upgrades to sovereign credit ratings in Spain, Greece. STOXX Europe 600 +0.2%, DAX +0.1%, CAC 40 +0.2%.
  • Asia mostly higher overnight; Japanese stocks flat ahead of Bank of Japan (BOJ) rate decision on Tuesday. Korea, Australian stocks lagged the region. Shanghai Composite +0.4%, Hang Seng +0.4%, KOSPI +0.7%.
  • Treasuries flat-to-slightly stronger; 10-yr. yield -1 basis point (-0.01%) to 2.65%.
  • Commodities: Oil ticking lower near $63.20/bbl., gold near flat, industrial metals up notably.
  • Today’s economic calendar is light; Chicago Fed National Activity Index overseas expected to increase from prior month.

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  • Putting the government shutdown in perspective. After a successful House vote last Thursday, the Senate’s failure to do the same resulted in the 19th government shutdown over the past 40 years. It’s important to note that government shutdowns have rarely caused economic dislocations. In fact, history has shown that any near-term economic effects resulting from shutdowns were temporary with economic readings reversing in ensuing quarters as government employees and contractors were paid and economic activity resumed.
  • As it pertains to the stock market, these experiences have proven to be a non-event. On average, the S&P 500 Index has fallen modestly during periods of closure; however, we encourage investors to view the current shutdown from the prisms of history, both long term and short term. Though the median return during shutdowns since the Ford Administration is flat, the recent history of equity market volatility has been unusually placid, with the last pullback of -5.0% in the S&P 500 having occurred in June 2016. This could suggest the market is looking for a reason to sell-off from all-time highs, and a prolonged government shutdown may prove a worthy, near-term catalyst.
  • Nonetheless, the fundamentals supporting growth in output and profits suggest to us that any shutdown-related market pullbacks may provide buying opportunities for suitable investors. Consequently, we recommend that investors focus on the solid fundamentals which we believe are supporting growth in economic activity and corporate profits, while appreciating the historical limited impacts that government shutdowns have had on the economy and the financial markets.

Macro Notes

  • We expect mid-teens S&P 500 earnings growth for the fourth quarter. As shown in our earnings season dashboard, although the magnitude of the upside in the quarter has been somewhat limited, beat rates have been excellent so far with just over 50 S&P 500 companies having reported results. A solid 79% of the companies have bested earnings estimates, while 87% have topped revenue targets, both well above recent averages. This week, 83 index constituents will report fourth quarter earnings, and we expect the positive trend to continue. Reasons for optimism include positive economic surprises, strong manufacturing activity, and a weak U.S. dollar. We touched on this in greater detail in our earnings blog last week and will expand on it further in our latest Weekly Market Commentary, due out later today. Looking ahead, our positive 2018 earnings outlook is well supported by our forecast for accelerating global growth and the new tax law. Our recently-raised estimate for S&P 500 earnings in 2018 to $147.50 may end up being conservative. Consensus estimates for 2018 have risen 3% in January alone, largely because of the new tax law, lifting consensus S&P 500 earnings growth estimates for 2018 to 16%, according to Thomson Reuters.

  • Central bank rate decisions and Q4 U.S. GDP are this week’s economic highlights. Major central bank meetings and policy rate decisions will dominate this week’s economic news with the BOJ expected to keep rates unchanged on Tuesday and the European Central Bank (ECB) announcing its policy decision on Thursday. Though the ECB is unlikely to announce any material changes at this point, market participants will pay close attention to the language in its forward guidance for any clues about future policy changes. Also on the docket, soft data in Germany and the Eurozone will be released via the ZEW Surveys, backed up by consumer confidence for the Eurozone, Germany, and France throughout the week. Markit Manufacturing and Services PMI data will be released on Wednesday for France, Germany, and the Eurozone. Consumer and producer inflation data in Japan is due out on Thursday, while U.S. gross domestic product for the fourth quarter will cap off the week and is expected to have increased at a 3% annualized rate due to strong business investment and household spending.
  • The latest Beige Book continues to suggest a steady economy. The Federal Reserve released its latest Beige Book last week ahead of the January 30-31, 2017 Federal Open Market Committee meeting. Our Beige Book Barometer (strong words minus weak words) rose to +62 in January, in line with the +64 average for all of 2017. Weather-related words, which had spiked following last year’s active hurricane season, began to fade, while taxes saw a lot of discussion as Main Street attempts to gauge the impact of the new tax law. Additional detail will be available in our Weekly Economic Commentary, due out later today.

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Click Here for our detailed Weekly Economic Calendar

Monday

  • Chicago Fed National Activity Report (Dec)
  • Japan: All Industry Activity Index (Nov)

Tuesday

  • Richmond Fed Mfg. Report (Jan)
  • Germany: ZEW Survey (Jan)
  • Eurozone: ZEW Survey (Jan)
  • Eurozone: Consumer Confidence (Jan)
  • BOJ: 10-yr Yield Target
  • BOJ: Outlook Report & Policy Rate Decision
  • Japan: Machine Tool Orders (Dec)
  • Japan: Trade Balance (Dec)
  • Japan: Nikkei Japan Mfg. PMI (Jan)

Wednesday

Thursday

  • Wholesale Inventories (Dec)
  • Advance Goods Trade Balance (Dec)
  • New Home Sales (Dec)
  • LEI
  • Germany: Consumer Confidence (Feb)
  • Germany IFO Business Climate (Jan)
  • Italy: Industrial Orders & Sales (Nov)
  • Canada: Retail Sales (Nov)
  • ECB: Main Refinance Rate
  • ECB: Marginal Lending & Deposit Facilities
  • BOJ: Minutes of Policy Meeting
  • Japan: CPI & PPI (Dec)

Friday

 

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