Performance for Week Ending 1/5/18:
The Dow Jones Industrial Average (Dow) added 2.33%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 2.33%, the Standard & Poor’s 500 Index (S&P 500) tacked on 2.60% and the Nasdaq Composite Index (NASDAQ) rose by 3.38%. Sector performance was positive with 8 of the 11 S&P groups finishing higher. The Technology sector (+4.22%) was the best performer while Utilities (-2.50%) was the worst.
||Closing Price 1/5/2018
||Percentage Change for Week Ending 1/5/2018
||Year-to-Date Percentage Change Through 1/5/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 1/1/2018 – 1/5/2018
Stocks kicked off the New Year on a positive note with the major market indices all posting strong gains for the week. Driving the performance was a batch of economic data showing the global economy remains on firm footing, a rebound in commodity prices and the likelihood that corporate tax reform will have a positive impact on bottom-line growth. Adding to the positive tone was affirmation from the Federal Reserve that rate hikes over the course of the year will be gradual.
Investors shrugged off the shortfall in non-farm payrolls as wages firmed and the unemployment rate held at the lowest level since 2000. The report was “goldilocks” in nature (not too hot, not too cold) as the economy added jobs and sustained unemployment levels, but not at a rate that would force the Fed to be more aggressive in its rate hike campaign. The Labor Department reported that nonfarm payrolls in December rose by a 148K, well below the 190K expected by economists. Tempering the shortfall was the upward revision to the November data which saw non-farm payrolls raised to +252K from the initial estimate of +228K. The unemployment rate was unchanged at 4.1% while average hourly earnings advanced by 0.3% during the month and are up 2.5% on a year-over-year basis.
Fed Meeting Minutes: Meanwhile, the minutes from the Fed's Dec. 12-13 meeting showed that officials believed the tax cuts would drive consumer spending and increased business investment, though they expressed uncertainty over the magnitude of the boost. The minutes showed that the central bank is still committed to a "gradual" pace for future rate hikes. There were, however, a few participants that worried three rate hikes this year might not be enough because "continued low interest rates risked financial instability in the future" or the possibility that the economy could start to overheat given that unemployment is already at a 17-year low and expected to decline further.
Contrarians take Note: Last week the American Association of Individual Investors (AAII) reported that the percent of ‘Bulls’ in its weekly survey rose to 60%, the highest since late December 2010, and up from 53% during the prior week. The percent of ‘Bearish’ investors fell to 15.6%, the lowest November 2014. Investing, in its simplest form, is about emotions – fear & greed. These emotions also tend to be contrarian in nature, meaning investors tend to be the greediest (Bullish) at/near market tops and the most fearful (Bearish) at/near market bottoms. While Bullish sentiment could continue to strengthen in the coming weeks, the current reading should be viewed is a yellow flag as it may be an early warning of some near-term turbulence.
Market View – Expect more of the Same In 2018: A few weeks ago, we noted that there was a strong likelihood that the markets upward momentum would carry over into the New Year. As we said throughout the bulk of 2017, it’s fundamentals (the economy, earnings, interest rates) that matter, and from a macro point of view, the world remains in the midst of a period of synchronized global growth, which has resulted in growing confidence in the earnings outlook. These trends are likely to remain in place over the next couple quarters. The US economy appears to be on track for a third consecutive quarter of near 3% growth while consensus expectations from Bloomberg call for over 14% earnings growth in 2018. In the near-term, inflation is likely to stay relatively muted which in turn should keep the Fed on a gradual rate hike path. While valuation levels are certainly elevated, they are far from extreme and 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 unchanged, 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: First-quarter earnings season will “unofficially” kick-off during the coming week when Dow-component JPMorgan Chase reports results on Friday. Results will trickle in over the coming weeks with peak reporting season starting in early February. The data calendar will be backend loaded with the closely watched Consumer Price Index and monthly Retail Sales reports scheduled for release on Friday. Other economic reports of interest include; the November JOLTS report, December import and export prices, and the December producer price index (PPI). The Fed speaking calendar will be busy with at least eight presentations scheduled throughout the week.
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.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
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