Performance for Week Ending 2/2/18:
The Dow Jones Industrial Average (Dow) fell 4.12%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 3.84%, the Standard & Poor’s 500 Index (S&P 500) shed 3.85% and the Nasdaq Composite Index (NASDAQ) fell by 3.53%. Sector performance was negative with all 11 of the S&P sector groups finishing lower. The Energy sector (-6.424%) led the way lower followed by Materials (-5.64%) and Healthcare (-5.06%).
||Closing Price 2/2/2018
||Percentage Change for Week Ending 2/2/2018
||Year-to-Date Percentage Change Through 2/2/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 1/29/2018 – 2/2/2018
The major market indices finished the week lower, breaking a four week winning streak. Signs of “buyer’s exhaustion” following the torrid start to the year coupled with an uptick in interest rates appeared to be the main catalysts for this week’s sell-off. The backup in rates is a reflection of the strong economy and rising wage pressure, which in turn is putting upward pressure on inflation expectations. Rising rates provide competitive headwinds to equities, but they also increase corporate and individual borrowing costs, which over time could impact the pace of economic growth and corporate bottom lines. Higher rates are already filtering through to mortgage rates. According to Freddie Mac, 30-year mortgage rates rose to 4.22% during the latest week, the highest level in 10 months.
What was interesting about this week’s equity sell-off was that there was no evident rotation into “safe haven” assets. The fact that there was no “flight-to-safety” suggests investors may be parking the proceeds in cash in anticipation of an eventual buying opportunity. While a meaningful correction in the market is long overdue, bull markets historically don’t end until we see a rising probability of a recession. The favorable narrative around the economy and earnings still remains very much intact and Guggenheim believes that a recession is not likely to develop until late-2019 / early 2020.
As January goes, so goes the Year (?): The S&P 500 finished January up 5.62%, the best start since 1997. According to the Stock Trader's Almanac, since 1950 there has never been a down year for the stock market when the S&P 500 has gained at least 4.0% in January; moreover, the average full-year price gain for the S&P 500 is 22% for the 20 years when it has gained at least 4.0% in January. In fact, there have only been three down years since 1950 when the S&P 500 has recorded any gain in January. Note that past performance is certainly no guarantee of future results.
Payrolls Solid, Wages Rising: Last week the Labor Department reported that nonfarm payrolls rose by 200K jobs during the month of January, moderately stronger than the 180K forecast by economists. The unemployment rate held steady at 4.1%. The focal point of the report was the rise in average hourly earnings (AHE). AHE’s rose by a slightly better than expected 0.3% during the month and are now up 2.9% on a year-over-year basis, the highest pace since early-2009. The jump in AHE’s seemed to spook the bond market (i.e. yields moved higher) due to fears that the Federal Reserve may have to take a more aggressive rate path forward.
Economy on Solid Footing: The closely watched Institute for Supply Management (ISM) Manufacturing Index showed manufacturing activity in the US expanded at a slightly slower pace in January but remained solidly in expansion territory. On the labor front, initial jobless claims during the week ended January 27 fell 1K to 230K and have now been below 300K—a level typically associated with a healthy labor market—for 152 consecutive weeks. Lastly, the Commerce Department reported that personal income in December rose by 0.4%, slightly above the expected gain of 0.3%. Personal spending during the month grew by an inline 0.4%. The personal savings rate fell to 2.4%, the lowest since September 2005, a level that underscores the notion that consumers might be saving less because they are feeling better about their job/income prospects.
Fed Meeting: As expected the Federal Reserve held benchmark interest rates steady at last week’s meeting, saying that labor markets continue to strengthen amid "solid" economic activity. The Fed also acknowledged that market measures of inflation compensation had “increased in recent months.” The after meeting statement used the word “further” two times, reinforcing expectations for multiple hikes this year (Note: Guggenheim is forecasting a total of 4 rate hikes over the course of 2018). The meeting was Fed Chair Janet Yellen's last as she is scheduled to turn over leadership to Jerome Powell this week. According to the World Interest Rate Probability (WIRP) function on Bloomberg, the probability of a March rate hike stands at 93% with the odds of a second hike in June at almost 63%.
Q4 Earnings Review: Through Friday, 251 members of the S&P 500 have reported results with just over 80% surprising to the upside, well above the 5-year average of 69%. The biggest ‘beats’ are coming from the Materials and Consumer Discretionary sectors. Aggregate earnings growth is tracking at a very robust 14.9% rate while overall sales are up 9.6%. At the current pace, it will mark the third time in the past four quarters that the index has reported 10%-plus earnings growth.
Market View: 2018 is expected to deliver another year of positive returns, but not likely as robust as what we saw in 2017. The macro environment remains supportive of equities based on; synchronized global growth, robust earnings growth and expectations the Fed will take a gradual rate hike path higher.
The markets have had an incredible run over the course of the past 12-plus months and it wouldn’t be surprising to see a meaningful correction at some point. However, assuming that macro fundamentals remain stable, a pullback would be viewed as healthy and an opportunity to add equity exposure to portfolios.
The Week Ahead: Although we have moved past peak reporting season, the fourth-quarter earnings calendar will remain busy with nearly 90 members of S&P 500 scheduled to report earnings. As is generally the case following the monthly payroll report, the data calendar will be relatively light. Reports of interest include; the ISM January non-manufacturing index, the December JOLTS report, and initial jobless claims. The Fed speaking calendar will be very busy with 8 public appearances on the docket. This week Jerome Powell will also take the helm at the Fed replacing Janet Yellen.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm’s headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.
Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.
The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.
The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.
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