What I’m Watching This Week – 20 February 2018

The Markets (as of market close February 16, 2018)

Stocks rebounded last week following a tumultuous few weeks of significant losses. Led by the Nasdaq, each of the benchmark indexes listed here posted solid gains. Both the large caps of the Dow and S&P 500 put up impressive gains exceeding 4.0%, as did the small-cap Russell 2000 and the Global Dow. Also of note is the fact that each index listed here is, once again, ahead of its respective 2017 year-end value. All told, last week was the best for stocks since early 2013. And, these gains occurred despite signals that inflation is beginning to pick up steam.

The price of crude oil (WTI) rebounded last week to close at $61.67 per barrel early Friday evening, up from the prior week’s closing price of $59.24 per barrel. The price of gold (COMEX) also increased last week to $1,350.40 by early Friday evening, climbing from the prior week’s price of $1,318.50. The national average retail regular gasoline price decreased for the first time in several weeks, falling to $2.607 per gallon on February 12, 2018, $0.030 lower than the prior week’s price but $0.300 higher than a year ago.

Market/Index 2017 Close Prior Week As of 2/16 Weekly Change YTD Change
DJIA 24719.22 24190.90 25219.38 4.25% 2.02%
Nasdaq 6903.39 6874.49 7239.47 5.31% 4.87%
S&P 500 2673.61 2619.55 2732.22 4.30% 2.19%
Russell 2000 1535.51 1477.84 1543.55 4.45% 0.52%
Global Dow 3085.41 3016.88 3144.75 4.24% 1.92%
Fed. Funds target rate 1.25%-1.50% 1.25%-1.50% 1.25%-1.50% 0 bps 0 bps
10-year Treasuries 2.41% 2.85% 2.87% 2 bps 46 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

  • Consumer prices for goods and services rose 0.5% in January, according to the Bureau of Labor Statistics. Over the last 12 months, the Consumer Price Index has risen 2.1%. Contributing to the price growth were increases in prices for gasoline, shelter, apparel, medical care, and food. The index less food and energy increased 0.3% in January and 1.8% over the past year. The energy index increased 5.5% and the food index advanced 1.7%. Rising consumer prices could spark fear of rising inflation (and interest rates) among investors, who may react by selling equity holdings, which, in turn, could drive down stock market values.
  • In yet another sign of potentially escalating inflation, the Producer Price Index increased 0.4% in January. Over the 12 months ended in January, producer prices are up 2.7%. The PPI less foods, energy, and trade services rose 0.4% in January, the largest advance since increasing 0.5% in April 2017.
  • Retail and food service sales fell by their largest margin in almost a year in January, according to the Census Bureau report. Retail sales decreased 0.3% compared to December — the largest month-over-month decline since February 2017. January’s drop was not as profound as it could have been since December’s sales figures were revised to show no gain from November following an initial report of a 0.4% increase. Notable drop-offs in January occurred in auto sales (-1.3%); building material, garden equipment, and supplies dealers (-2.4%); and health and personal care (-1.2%). Year-over-year, retail sales are up 3.6%. Nonstore (internet) retail sales showed no change in January but advanced 10.2% from January 2017.
  • The monthly government budget for January saw a surplus of $49.2 billion. For fiscal 2018, the deficit sits at $175.7 billion compared to $158.6 billion over the same period in 2017. While government receipts are up 4.2% from the same period last fiscal year, government expenditures have increased 5.1%.
  • Industrial production edged down 0.1% in January following four consecutive monthly increases. Manufacturing output was unchanged in January for a second consecutive month, although the index has increased 1.8% over the past 12 months. Mining output fell 1.0%, while the index for utilities moved up 0.6%. Capacity utilization for manufacturing was unchanged in January at 76.2%, a rate that is 2.1 percentage points below its long-run average.
  • New residential construction, which finished 2017 in fine fashion, continued to surge in January. According to the Census Bureau report, building permits increased 7.4% from December and housing starts jumped 9.7%. Housing completions fell 1.9%, but are 7.7% ahead of their January 2017 pace.
  • Prices are rising in trade, both foreign and domestic. January saw prices for U.S. exports rise 0.8%, while import prices climbed 1.0%. The 1.0% advance (which also occurred last November) marked the largest one-month rise since the index increased 1.2% in May 2016. Import prices advanced 3.6% between January 2017 and January 2018. Exports have not risen by more than 0.8% since advancing 1.1% in May 2016.
  • In the week ended February 10, there were 230,000 initial claims for unemployment insurance, an increase of 7,000 from the previous week’s level, which was revised up by 2,000. The advance insured unemployment rate remained 1.4% for the week ended February 3. The advance number of those receiving unemployment insurance benefits during the week ended February 3 was 1,942,000, an increase of 15,000 from the prior week’s level, which was revised up by 4,000.

Eye on the Week Ahead

The Presidents’ Day week is a slow one for economic reports. However, the minutes from the last Federal Open Market Committee meeting held in January are available and may shed some light on the Committee’s take on inflationary trends and the prospects of increasing the federal funds target rate.

To view the What I’m Watching This Week Portfolio, please click here. (Free Membership is required) https://www.barchart.com/my/featured-portfolios

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What I’m Watching This Week – 12 February 2018

The Markets (as of market close February 9, 2018)

OUCH! That’s probably the most apt way to describe investor sentiment about the stock market over the past couple of weeks. Despite a strong close last Friday, each of the benchmark indexes listed here lost significant value for the week. Volatility is running rampant, marked by big swings occurring throughout each day of trading. The Dow suffered 1000 point losses last Monday and Thursday — the largest in history. Following months of record highs, market indexes have given back January gains to fall below their year-end values. Last week’s losses are the steepest in over two years. And the hits taken by equities aren’t restricted to domestic stocks, as many major indexes around the globe saw significant downturns. Apparently, fear of impending inflation and interest rate escalation has pushed investors out of stocks and long-term bonds, as evidenced by the increase in the yield on 10-year Treasuries (as prices fall, yields increase).

Will this trend continue? Of course, it’s hard to predict, but fourth-quarter corporate earnings continue to exceed expectations and the employment sector continues to expand, albeit at a slower pace. Also, stocks hit a similar wall at the beginning of 2016, only to bounce back to post strong gains by the end of the year.

The price of crude oil (WTI) fell for the second consecutive week to $59.24 per barrel last Friday, down from the prior week’s closing price of $65.06 per barrel. The price of gold (COMEX) decreased last week to $1,318.50 by early Friday evening, falling from the prior week’s price of $1,335.20. The national average retail regular gasoline price increased for the seventh consecutive week to $2.637 per gallon on February 5, 2018, $0.030 above the prior week’s price and $0.344 more than a year ago.

Market/Index 2017 Close Prior Week As of 2/9 Weekly Change YTD Change
DJIA 24719.22 25520.96 24190.90 -5.21% -2.14%
Nasdaq 6903.39 7240.95 6874.49 -5.06% -0.42%
S&P 500 2673.61 2762.13 2619.55 -5.16% -2.02%
Russell 2000 1535.51 1547.27 1477.84 -4.49% -3.76%
Global Dow 3085.41 3214.56 3016.88 -6.15% -2.22%
Fed. Funds target rate 1.25%-1.50% 1.25%-1.50% 1.25%-1.50% 0 bps 0 bps
10-year Treasuries 2.41% 2.83% 2.85% 2 bps 44 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

  • According to the latest Job Openings and Labor Turnover report for December, the number of job openings fell by about 167,000 from November. The number of hires in December compared to November was essentially the same at 5.5 million, as was the number of separations (5.24 million). Job openings increased in accommodation and food services, government, and information. Sectors with decreasing job openings include construction, manufacturing, retail trade, and professional and business services. Over the 12 months ended in December, hires totaled 64.7 million and separations totaled 62.6 million, yielding a net employment gain of 2.2 million.
  • The trade gap widened in December by $53.1 billion, according to the latest report from the Census Bureau. While exports expanded by 1.8%, imports grew by a steep 2.5%. Rising exports reflects strong global demand for domestic products and services, particularly on the heels of a falling dollar. Imports of consumer goods drove the increase on that side of the ledger, rising 6.1% in December. For 2017, the goods and services deficit increased $61.2 billion, or 12.1%, from 2016.
  • Growth in the non-manufacturing (services) sector expanded in January, according to the Institute for Supply Management’s non-manufacturing survey. The ISM® Non-Manufacturing Index registered 59.9%, almost 4.0 percentage points ahead of December’s reading. The index, which surveys 17 service industries such as real estate and food services, had been slowing until January’s reading. Survey respondents noted growth in new orders, employment, and prices last month.
  • In the week ended February 3, initial claims for unemployment insurance was 221,000, a decrease of 9,000 from the previous week’s level. The advance insured unemployment rate remained 1.4%. The advance number of those receiving unemployment insurance benefits during the week ended January 27 was 1,923,000, a decrease of 33,000 from the prior week’s level, which was revised up by 3,000.

Eye on the Week Ahead

While the economy has been steady, price inflation has lagged. This week, January’s figures on prices for goods and services at both the consumer and retail level are available. A bump in prices could be a warning of rising inflation, prompting investors to sell equities and long-term bonds.

What I’m Watching This Week – 5 February 2018

The Markets (as of market close February 2, 2018)

Whether it was the start of a market correction or just a blip in what otherwise has been an almost nine-year bull run, equities suffered their largest losses in quite some time last week. Each of the benchmark indexes listed here fell more than 3.0%, led by the Dow, which endured its largest weekly drop-off since last January. The S&P 500, which fell 3.85%, marked its largest decrease in two years. Lower-than-expected earnings reports from some major energy companies drove stocks down. But a possible fear that interest rates — along with inflation — would be rising may have pushed investors to sell not only equities but long-term bonds as well.

The price of crude oil (WTI) fell for the first time in several weeks to $65.06 per barrel last Friday, down from the prior week’s closing price of $66.24 per barrel. The price of gold (COMEX) decreased last week to $1,335.20 by early Friday evening, falling from the prior week’s price of $1,353.30. The national average retail regular gasoline price increased for the sixth consecutive week to $2.607 per gallon on January 29, 2018, $0.040 above the prior week’s price and $0.311 more than a year ago.

Market/Index 2017 Close Prior Week As of 2/2 Weekly Change YTD Change
DJIA 24719.22 26616.71 25520.96 -4.12% 3.24%
Nasdaq 6903.39 7505.77 7240.95 -3.53% 4.89%
S&P 500 2673.61 2872.87 2762.13 -3.85% 3.31%
Russell 2000 1535.51 1608.06 1547.27 -3.78% 0.77%
Global Dow 3085.41 3322.69 3214.56 -3.25% 4.19%
Fed. Funds target rate 1.25%-1.50% 1.25%-1.50% 1.25%-1.50% 0 bps 0 bps
10-year Treasuries 2.41% 2.66% 2.83% 17 bps 42 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

  • The labor sector continues to be strong entering the new year. January saw 200,000 new jobs added, while the unemployment rate remained at 4.1%, according to the latest report from the Bureau of Labor Statistics. Employment continued to trend up in construction, food services and drinking establishments, health care, and manufacturing. There were 6.7 million unemployed, yielding a labor participation rate of 62.7%, unchanged for the fourth consecutive month. The employment-population ratio was 60.1% for the third month in a row. The average workweek declined by 0.2 hours in January to 34.3 hours. Average hourly earnings rose $0.09 to $26.74, following an $0.11 increase in December. Over the year, average hourly earnings have risen by $0.75, or 2.9%. The drop in the average workweek could be an indication of a lack of available workers, which would likely hold down production.
  • The Federal Open Market Committee met last week for the first time in 2018, which also marked the final meeting over which Janet Yellen would preside as chairperson. The Committee did not increase the federal funds rate, noting that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. Nevertheless, both overall inflation and inflation for items other than food and energy have continued to run below 2%. The Committee still expects three rate adjustments over the course of the year. Also, the Committee unanimously approved the selection of Jerome H. Powell as chair.
  • Personal income increased $58.7 billion, or 0.4%, in December, according to estimates released by the Bureau of Economic Analysis. Disposable (after-tax) personal income (DPI) increased $48.0 billion, or 0.3%, and personal consumption expenditures (PCE) increased $54.2 billion, or 0.4%. Showing little inflationary pressures, prices for consumer goods and services bumped up 0.1% (1.7% from a year ago), while prices excluding food and energy rose 0.2% for the month (1.5% from a year ago). Wages and salaries climbed a noteworthy 0.5% for the month. On the other hand, consumer savings dipped 0.1 percentage point to 2.4%, possibly an indication that consumers may have dropped into savings for purchases.
  • The IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 55.5 in January, up from 55.1 in December. The latest index reading indicated a strong improvement in business conditions across the manufacturing sector. Moreover, the index signaled the strongest upturn in the health of the sector for over two and a half years. The rate of manufacturers’ growth accelerated at the fastest pace in 12 months. As demand increased, manufacturers raised their selling prices at the second-steepest pace since September 2014. At first blush, the Manufacturing ISM® Report On Business® appears to contradict Markit’s report. However, a closer reading reveals that new orders are increasing, but a slowing in employment may be an indication that there aren’t enough workers to meet the accelerating demands of manufacturing and product shipment.
  • Consumer confidence in the economy has cooled from earlier last year, yet it rose a bit in January, according to The Conference Board. Consumer confidence in the present economic situation decreased slightly, while consumers were more optimistic about economic improvement in the short term.
  • In the week ended January 27, initial claims for unemployment insurance was 230,000, a decrease of 1,000 from the previous week’s level, which was revised down by 2,000. The advance insured unemployment rate remained 1.4%. The advance number of those receiving unemployment insurance benefits during the week ended January 20 was 1,953,000, an increase of 13,000 from the prior week’s level, which was revised up by 3,000.

Eye on the Week Ahead

Equities continue to break records, as fourth-quarter corporate earnings reports remain relatively positive. This week is relatively quiet as to impactful economic reports. The December report on international trade in goods and services may reveal a shrinking trade deficit, as exports could increase following the dollar’s slippage.

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Monthly Market Review – January 2018

The Markets (as of market close January 31, 2018)

Equities pulled back off of their record-setting gains at the end of January, but not enough to forestall a month of significant gains. January provided several noteworthy storylines for investors to consider. Unemployment remained low as the number of available job openings continued to recede, possibly signaling a push for higher wages. Fourth-quarter corporate earnings were relatively strong. The president’s first State of the Union address preached optimism and called for bipartisan cooperation on major economic and international issues. The government shut down for a few days before approving a stopgap budget resolution through early February. Some American workers saw a modest bump in pay, courtesy of the Tax Cuts and Jobs Act legislation passed in December. And Janet Yellen’s final meeting as chair of the Federal Reserve saw the Committee maintain interest rates at their year-end level.

The month started on a strong note as the Dow soared past 25000, ultimately reaching 26000 mid-month. The S&P 500 closed the first week of January up 2.6% and continued to post positive weekly gains through the month, ultimately gaining over 5.5%. The tech-heavy Nasdaq picked up in 2018 where it left off in 2017, gaining 7.36% by the end of January. Both the Global Dow and the small caps of the Russell 2000 enjoyed positive monthly returns, closing up 5.84% and 2.57%, respectively.

By the close of trading on January 31, the price of crude oil (WTI) was $64.77 per barrel, up from the December 29 price of $60.10 per barrel. The national average retail regular gasoline price was $2.607 per gallon on January 29, up from December 25, 2017, selling price of $2.472 and $0.311 more than a year ago. The price of gold increased by the end of January, closing at $1,348.50 on the last trading day of the month, up $43.40 from its price of $1,305.10 on December 29, 2017.

Market/Index 2017 Close Prior Month As of January 31 Month Change YTD Change
DJIA 24719.22 24719.22 26149.39 5.79% 5.79%
NASDAQ 6903.39 6903.39 7411.48 7.36% 7.36%
S&P 500 2673.61 2673.61 2823.81 5.62% 5.62%
Russell 2000 1535.51 1535.51 1574.98 2.57% 2.57%
Global Dow 3085.41 3085.41 3265.63 5.84% 5.84%
Fed. Funds 1.25%-1.50% 1.25%-1.50% 1.25%-1.50% 0 bps 0 bps
10-year Treasuries 2.41% 2.41% 2.70% 29 bps 29 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Month’s Economic News

  • Employment: Total employment rose by 148,000 in December following November’s revised total of 252,000. Employment gains occurred in health care, construction, and manufacturing. The unemployment rate remained at 4.1%. The number of unemployed persons marginally declined by 40,000 to 6.576 million. The number of new entrants to the workforce increased by 116,000 in December. The labor participation rate remained unchanged at 62.7%. The employment-population ratio was unchanged at 60.1% in December but was up by 0.3 percentage point over the year. The average workweek for all employees remained at 34.5 hours in December. Average hourly earnings increased by $0.09 to $26.63. Over 2017, average hourly earnings have risen $0.65, or 2.5%.
  • FOMC/interest rates: The Federal Open Market Committee met for the first time in 2018 at the end of January, marking the last meeting chaired by Janet Yellen. By a unanimous vote, the Committee decided to leave the target federal funds rate range at 1.25%-1.50%. The Committee also selected Jerome H. Powell to serve as its chairman, effective February 3, 2018. Nothing from the latest meeting indicates a change from prior statements — economic activity is expected to continue to strengthen, with gains noted in employment, household spending, and business fixed investment. The Committee next meets in March.
  • GDP/budget: The first estimate of the fourth-quarter gross domestic product showed expansion at an annual rate of 2.6%, according to the Bureau of Economic Analysis. The third-quarter GDP grew at an annualized rate of 3.2%. Consumer spending rose 3.8%, with notable increases in durable goods spending (14.2%) and residential investment (11.6%). As to the government’s budget, December’s deficit was $23.2 billion, increasing fiscal 2018 (October, November, and December) deficit to $225.0 billion — 7.2% higher than the deficit over the same period last year.
  • Inflation/consumer spending: Inflationary pressures continued to show continued upward momentum in October. The personal consumption expenditures (PCE) price index (a measure of what consumers pay for goods and services) ticked up 0.4% for December following a November gain of 0.6%. The core PCE price index (excluding energy and food) inched ahead 0.2% in December. Personal (pre-tax) income increased 0.4% and disposable personal (after-tax) income gained 0.3% from the prior month. Personal consumption expenditures (the value of the goods and services purchased by consumers) climbed 0.4% in December after jumping 0.8% the prior month.
    • The Consumer Price Index, which rose 0.4% in November, edged up only 0.1% in December. For 2017, consumer prices are up 2.1%, a mark that approaches the Fed’s 2.0% target for inflation. Core prices, which exclude food and energy, increased 0.3% in December, and are up 1.8% for the year.
    • The Producer Price Index showed the prices companies receive for goods and services fell 0.1% in December — the first decline since August 2016. Year-over-year, producer prices have increased 2.6%. Prices less food and energy also dropped 0.1% for the month and closed 2017 up 2.3%.
  • Housing: Home sales slowed in December. Total existing-home sales dropped 3.6% in December after climbing 5.6% the prior month. However, over the last 12 months, sales of existing homes increased 1.1%. The December median price for existing homes was $246,800, which is 5.8% higher than the December 2016 price. Inventory for existing homes fell 11.4% for the month, representing a 3.2-month supply. The Census Bureau’s latest report reveals sales of new single-family homes also fell in December, declining 9.3% from November. Despite the December swoon, new home sales closed the year 14.1% above the December 2016 estimate. The median sales price of new houses sold in December was $335,400. The average sales price was $398,900. There were 295,000 houses for sale at the end of December, which represents a supply of 5.7 months at the current sales rate.
  • Manufacturing: Industrial production increased 0.9% in December, despite manufacturing output edging up only 0.1%. Industrial production rose 3.6% in 2017. Capacity utilization increased 2.0 percentage points to 77.9% in December. Mining output increased 1.6% for the month and is up 11.5% from its year-earlier level. The index for utilities jumped 5.6% for December and 1.8% for 2017. New orders for manufactured durable goods jumped 2.9% in December following a 1.3% November gain. For the year, new durable goods orders increased 11.5%.
  • Imports and exports: The advance report on international trade in goods revealed that the trade gap increased in December from November, rising from $69.7 billion to $71.6 billion. Exports of goods for December jumped 2.7% following November’s 3.3% gain. Imports of goods climbed 2.5% after rising 2.7% in November. Still, total imports ($209.2 billion) far exceeded exports ($137.6 billion). Prices for both imported and exported goods and services were weak in December. Import prices rose only 0.1% for the month, while export prices fell 0.1%. For the year, import prices increased 3.0%, while export prices advanced 2.6%.
  • International markets: Several advanced economies, including Germany, Japan, and South Korea, experienced higher-than-expected economic growth in the third quarter. Other countries, such as China, Brazil, and South Africa, also posted third-quarter growth that exceeded expectations. Preliminary information on the fourth quarter is showing continued growth. As the U.S. dollar fades, the euro has increased in value, reaching a three-year high compared to the dollar. The European Central Bank kept its monetary policy intact in January, despite encouraging economic growth in the EU. In China, growth in industrial profits slowed, which could continue through 2018.
  • Consumer sentiment: Consumer confidence, as measured by The Conference Board Consumer Confidence Index®, increased in January after falling in December. The index increased to 125.4, up from 123.1 in December. According to the report, consumer expectations in the economy improved in January following a sharp decline the prior month.

Eye on the Month Ahead

Investors hope stocks continue to soar in February following January’s impressive performance. The Federal Open Market Committee (FOMC) does not meet in February, so interest rates will remain unchanged through the month heading into March. Oil prices are expected to maintain their current prices during the month, while the U.S. dollar may sink further.

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