Market Update: Wednesday, January 31, 2018

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Market Recap

  • Major U.S. indexes down sharply again as cautious tone overtakes market. S&P 500 Index -1.0%, Dow -1.4%, Nasdaq -0.9%, Russell 2000 -1.0%.
  • Utilities were the only sector to close higher. Healthcare, energy–following weaker crude–led underperformers.
  • Broad negative breadth continues; NYSE (4.2:1), Nasdaq (3:1) amid slightly above-avg. volume (~105% of 30-day avg.).
  • Treasury yields finished up; 10-yr. yield settled +3 basis points (+0.03%) to 2.72%.
  • Commodities: WTI crude oil slide persisted (-1.9% to $64.32/bbl.), COMEX gold lower (-0.3% to $1337/oz.); industrial metals mostly higher.

Overnight & This Morning

  • U.S. equities opened higher following biggest one-day decline since August 2017; positive tilt toward economics in State of the Union address.
  • Europe generally higher midday as markets assess economic data, possible State of the Union trade implications. STOXX Europe 600 flat, DAX +0.2%, CAC +0.2%.
  • Asia mixed overnight; Japan a notable underperformer despite strengthening industrial production numbers. Nikkei -0.8%, Shanghai Composite -0.2%, Hang Seng +0.8%.
  • Commodities: Oil rout continues increased U.S. shale production (-0.5% to $64.16/bbl.), gold +0.5% to $1346/oz., industrial metals lower across the board.
  • Economic data: U.S. pending home sales increased at a quicker month-over-month rate than expected (0.55% vs. 0.5%), Employment Cost Index (0.6%), Eurozone unemployment rate fell in line with expectations (8.7%).

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Key Insights

  • No changes expected at Fed meeting. Janet Yellen’s final meeting as Federal Reserve (Fed) chair will wrap up today, with a statement at 2 p.m. ET–but no press conference. We don’t expect a rate hike, but investors will be watching closely to see if the recent rise in market-based inflation expectations has any impact on the Fed’s thinking. Jerome Powell will take over as Fed chair on February 3, and is expected to continue on a similar path of monetary policy as Yellen, with a gradual, data-dependent path of rate hikes (markets widely expect a rate increase at his first meeting as chair, on March 20-21, 2018) and balance sheet normalization following the Fed’s previously outlined plan. He is, however, widely viewed as more open to easing the regulatory burden on banks than his predecessor. For more information on the post-Yellen Fed, please see yesterday’s Bond Market Perspectives, “The Fed Is Moving Forward”.

Macro Notes

  • Policy risk in healthcare remains. During last night’s State of the Union address, President Trump said fixing the injustice of high drug prices is a top priority for the administration. This risk is likely to persist, even if available policy responses can have only a modest impact. As such, we believe tempered enthusiasm for the sector is prudent, as we recommended when we downgraded our sector view to neutral in our Portfolio Compass publication on November 15, 2017. Though not exactly a policy risk, yesterday’s announced entry into the employee healthcare business by three corporate titans (Amazon, Berkshire Hathaway, and JPMorgan) shines light on the potential to wring some costs out of the system, a challenge for healthcare supply chain profits.
  • The dip continues. The S&P 500 fell more than 1% for the first time since August. In the end, it was an amazing 112 days in a row without a 1% drop–the longest streak since 1985. Not to be outdone, it was also the first back-to-back declines of the year. Only 1979 started a year longer without seeing two consecutive red days. Last, it was the first consecutive 0.5% or greater loss days in 310 days–an all-time record. We continue to expect significantly more volatility in 2018 and these could be clues that will indeed happen.
  • The January Barometer. There’s an old saying on Wall Street: “So goes January, goes the year,” implying that if the first month of the year is strong, the final 11 months will be as well, and vice versa. Since 1950[1], if January was green then the final 11 months were up more than 12% on average versus up only 1% if that first month was red. The returns get even better after a strong first month like we are on track to see in 2018. Today on the LPL Research blog we will take a closer look at this phenomenon.
    [1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

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Click Here for our detailed Weekly Economic Calendar

Wednesday

Thursday

  • Non-Farm Productivity (Q4)
  • Markit Mfg. PMI (Jan)
  • Construction Spending (Dec)
  • ISM Mfg. (Jan)
  • Italy: Markit Italy Mfg. PMI (Jan)
  • France: Markit France Mfg. PMI (Jan)
  • Germany: Markit Germany Mfg. PMI (Jan)
  • Eurozone: Markit Eurozone Mfg. PMI (Jan)
  • UK: Markit UK Mfg. PMI (Jan)
  • Australia: Commodity Index (Jan)
  • Canada: Mfg. PMI (Jan)
  • Japan: Vehicle Sales (Jan)
  • Japan: Monetary Base (Jan)

Friday

  • Change in Nonfarm, Private & Mfg. Payrolls (Jan)
  • Unemployment Rate (Jan)
  • Average Hourly Earnings (Jan)
  • Average Weekly Hours (Jan)
  • Labor Force Participation & Underemployment Rates (Jan)
  • Durable Goods Orders (Dec)
  • Cap Goods Orders & Shipments (Dec)
  • Williams (Dove)
  • Eurozone: PPI (Dec)
  • Italy: CPI (Jan)

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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