Performance for Week Ending 1/19/18:
The Dow Jones Industrial Average (Dow) added 1.04%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.81%, the Standard & Poor’s 500 Index (S&P 500) tacked on 0.86% and the Nasdaq Composite Index (NASDAQ) rose by 1.04%. Sector performance was positive with 7 of the 11 S&P groups finishing higher. The Consumer Staple sector (+2.37%) was the best performer while Energy (-1.29%) was the worst.
||Closing Price 1/19/2018
||Percentage Change for Week Ending 1/19/2018
||Year-to-Date Percentage Change Through 1/19/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 1/15/2018 – 1/19/2018
Stocks finished the week higher reflecting a batch of solid economic data, a strong start to fourth quarter earnings season and an upbeat outlook from the Fed’s Beige Book report. Investors shrugged off the threat of a government shutdown as past shutdowns have been generally short and had little impact on the economy and financial markets.
Earnings – So Far, So Good: Despite high expectations, fourth quarter earnings season is off to a better than expected start. Through Friday, 53 members of the S&P 500 have reported results with 83% surprising to the upside. The biggest ‘beats’ are coming from the Energy, Industrials and Consumer Discretionary sectors. Aggregate earnings growth is tracking at a 13% rate while overall sales are up over 7% - both growth rates are moderately ahead of expectations heading into the start of reporting season.
Beige Book Looking Bright: The Fed’s Beige Book – an anecdotal summary of economic conditions compiled by the 12 regional Reserve Banks – painted an upbeat picture. It noted 11 Districts reported “modest to moderate gains” in activity and Dallas reported a “robust” increase. Non-auto consumer spending improved since the last report and some contacts reported that holiday retail sales were stronger than expected. Labor market conditions were characterized as “tight” but wage growth was said to be “modest” in most districts. Price pressures were mixed after having strengthened in the November report.
Market View – Expect more of the Same In 2018: 2018 is expected to deliver another year of positive returns, but not likely as robust as what we saw in 2017. While we’ve turned a page on the calendar, the broader narrative driving the performance in 2017 has not changed and from our point of view remains firmly in place:
- We are currently in a period of synchronized global growth. Domestically, our economy posted 3%-plus growth in both the second and third quarters and according to the Atlanta Fed’s GDPNow tracking model, fourth quarter growth (which will be reported on Jan 26) is tracking at a similar pace.
- Inflationary pressures remain muted.
- Earnings growth is expected to remain robust, with the consensus growth expectations, according to FactSet, at upwards of 14% growth in 2018
- The path higher for the Fed is expected to be very gradual. Although Guggenheim is calling four 4 rates hikes this year (one per quarter), we continue to believe the rate environment will remain supportive of risk assets.
- Valuation: At over 18x 2018 eps estimates - valuation levels are certainly stretched however they are far from extreme. Higher than average valuation levels seem somewhat justified in light of the low levels of inflation, stability in the economy, and strong levels of profitability.
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 in the coming months. However, assuming that macro fundamentals remain stable, a pullback would be viewed as healthy and an opportunity to add equity exposure to portfolios.
In terms of upside, valuation levels are not likely to expand from current levels, therefore earnings growth will likely be the determining factor in gauging performance potential. If analysts are relatively close to their current forecast, we can expect another decent year ahead.
The Week Ahead: Earnings season moves to the front burner this week with 84 members of the S&P 500 scheduled to release results. Included in this group are nine components of the Dow. The data calendar will also be busy during the coming week. Reports of interest include; the January PMI Composite, December existing home sales, December new home sales, December durable goods orders and the first estimate of fourth-quarter GDP. The Fed speaking calendar will be relatively light reflecting the traditional blackout period ahead of the following week’s FOMC Meeting.
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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