Performance for Week Ending 1/26/18:
The Dow Jones Industrial Average (Dow) added 2.09%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 2.09%, the Standard & Poor’s 500 Index (S&P 500) tacked on 2.23% and the Nasdaq Composite Index (NASDAQ) rose by 2.31%. Sector performance was positive with all 11 of the S&P sector groups finishing higher. The Healthcare sector (+3.54%) led the way followed by Telecom (+3.52%) and Consumer Discretionary (+3.23%).
||Closing Price 1/26/2018
||Percentage Change for Week Ending 1/26/2018
||Year-to-Date Percentage Change Through 1/26/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 1/22/2018 – 1/26/2018
The major market indices rose for a fourth consecutive week reflecting the strong macro environment and rising expectations for corporate earnings growth following the passage of tax reform. The reduction in individual tax rates is also expected to result in higher consumer spending, the main driver of domestic economic growth. The market may already be discounting the latter scenario as witnessed by the strong year-to-date performance in consumer discretionary stocks. The ongoing weakness in the US dollar also helped fuel the positive sentiment as a weaker dollar is positive for multinationals earnings and it also makes imported goods more expensive, which could favor a shift to American made goods and services. The 7.0%-plus gain in the S&P 500 is among one of the strongest starts to the year dating back to 1950.
After growing slightly better than 3% in both the second and third quarters, the Commerce Department reported that the US economy grew an annual rate of 2.6% in the fourth quarter, modestly below expectations of 3.0%. While the headline number fell short of expectations, the “guts” of the report were much more encouraging. Consumer spending, which accounts for roughly 70% of the economy, jumped by 3.8% -- the fastest growth rate since the first quarter of 2015. In addition, business spending also increased, with spending on equipment increasing at the strongest pace since the third quarter of 2014.
Earnings Remain a Positive Catalyst: Despite high expectations, fourth quarter earnings season is off to a better than expected start. Through Friday, 133 members of the S&P 500 have reported results with 81% surprising to the upside, well above the 5-year average of 69%. The biggest ‘beats’ are coming from the Energy and Information Technology sectors. Aggregate earnings growth is tracking at a 10.9% rate while overall sales are up nearly 8%. 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, muted levels of inflation, robust earnings growth, and expectations the Fed will take a very gradual rate hike path.
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.
The Week Ahead: The upcoming week will be a very busy with a slew of earnings reports, the two-day Federal Open Market Committee (FOMC), and a full economic calendar that includes the closely watched monthly Payroll report. On the earnings front 114 members of the S&P 500 are scheduled to report, including 10 members of the Dow. The FOMC will hold a two-day meeting starting on Tuesday. It will be the last meeting with Janet Yellen serving as the chair. The meeting statement will be released on Wednesday around 2:00 p.m. ET. No change in policy is expected. Reports of interest on the data calendar include; December personal income and spending, the November Case-Shiller home price index, the Conference Board’s January consumer confidence survey, the January ADP employment report, December pending home sales, January motor vehicle sales, the ISM’s January manufacturing index, December construction spending, and the monthly Payroll report. The Fed speaking calendar will be quiet with only San Francisco President John Williams scheduled to speak on Friday.
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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*Assets under management is as of 09.30.2018 and includes leverage of $11.8bn.
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