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Week in Review

Week Ending: January 26, 2018

Recap & Commentary

Equity markets continued their strong start to the year, with the S&P 500 again ending the week at a new record high.

Congress ended the government shutdown after three days by passing a continuing resolution to fund the government through February 8. The agreement to re-open the government did not fundamentally address the issue(s) that led to the shutdown in the first place, namely immigration. Without significant progress on the issue, another shutdown after the 8th remains a possibility.

The U.S. Dollar fell to its lowest level since 2014 following comments by Treasury Secretary Steven Mnuchin. Speaking in Davos, Mnuchin broke from the recent precedent of supporting a stronger dollar by stating that “a weaker dollar is good for us as it relates to trade and opportunities.”

The administration placed tariffs on imported solar panels and washing machines. Imported solar panels account for ~80% supply in the U.S. By some estimates, the higher prices could result in the loss of as many as 23k solar power related jobs.

Through Friday, 120 companies (24%) within the S&P 500 had reported fourth-quarter earnings. To date, 76% of companies have beaten their earnings estimates. The larger surprise, however, has been the record number of companies that have beaten their revenue estimates. According to FactSet, that figure stands at 81%, compared to 64% and 56% for the past one and five years, respectively.

Economic Bullet Points

Housing sector data was mixed. Existing Home Sales were constrained by lack of supply, while the headline decline in New Home Sales masked what was a solid month for the index. Supply of existing homes fell a sharp 11.4% M/M, and prices softened which won’t help to draw homes onto the market. New home sales declined, but December’s annualized rate marked the fourth best of the expansion, and importantly, supply improved.

December’s Durable Goods Orders report points to a factory sector that is being driven by aircraft and defense; ex-transportation durable orders just hit expectations. Core capital goods declined, indicating a slow start for first quarter business investment. Shipments of core capital goods were positive, however, which is reflected in the solid showing for nonresidential fixed investment in 4Q17 GDP.

Fourth quarter GDP rose at a 2.6% annualized rate, slightly below expectations, but underlying details show a very strong consumer and an economy that accelerated into year-end 2017 and has strong momentum entering 2018. Consumer spending rose 3.8%, and residential investment, another consumer related component, rose impressively as well. Nonresidential fixed investment, an indicator on business spending, saw its fourth straight month of growth.

Jobless Claims remain very low, pointing to another healthy employment report coming up.

Of Note

Since 1950, the S&P 500 has produced positive January returns in 41 out of 68 years (60%). In those years, the S&P 500 went on to produce an average calendar year return of 20.9%, with a range of -11.9% to 52.6%. Just two of the calendar years were negative. In 13 out of the 41 years, the S&P 500 gained more than 5% in January. In those years, the average annual return was 29.1% with a range of 5.3% to 52.6%. Through Friday, the S&P 500 had returned 7.6%.

Market Indices Week of 1/26

S&P 500                     2.2%

Russell 2000              0.7%

MSCI EAFE               1.5%

MSCI EM                    3.3%

Commodities            2.5%

Barclay’s Agg.            0.0%

US Dollar Index        -1.7%

10-Yr Yield                   2.66%

Oil ($/bl)                          $66

Gold ($/oz)                 $1,353

The Week Ahead

  • Factory Orders
  • ISM Manufacturing Index
  • Case-Shiller HPI
  • Construction Spending
  • Personal Income & Outlays
  • Consumer Confidence
  • Consumer Sentiment
  • Employment Situation
  • Jobless Claims

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