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Week in Review

Week Ending: Friday, January 5, 2018

Recap & Commentary

The new year picked up where the old one left off, with markets continuing to set new record highs. The DOW crossed 25,000, the NASDAQ crossed 7,000, and the S&P crossed 2,700 while recording its strongest weekly performance in over a year. Similar to 2017, headlines seemed to be dominated by the continuous drama and intrigue surrounding Washington, D.C. And like 2017, markets were largely unfazed.

Given the strength of markets in 2017, current valuation levels, and how overdue the market is for a 5-10 correction based on historical standards, many investors are concerned about what 2018 might hold in store. With the standard caveat about how history rarely repeats itself but does manage to rhyme, we found the following to be of interest. Since 1950, there have been 24 years (not counting 2017) in which the S&P 500 has returned more than 20%. Following those years the S&P has generated an average of return of 13% with a range from –9% to 33%. While that doesn’t mean that 2018 will adhere to any of that, it does mean that investors don’t have to automatically resign themselves to losses.

Minutes released from the U.S. Federal Reserve's December meeting showed that several board members expressed growing confidence in the strength of the labor market and the economy. Some members also said newly approved tax cuts might require the Fed to take a more aggressive stance this year on raising interest rates. The Fed’s current projections show them raising rates an additional three times in 2018.

Economic Bullet Points

Data out of the manufacturing sector pointed to continued strength. The ISM Manufacturing Index rose to 59.8 in December, led by new orders which reached a 14-year high. The report bodes well for continued strength in manufacturing entering 2018. Partially offsetting the ISM data was Factory Orders, which were less upbeat. While the headline gain of 1.3% was ahead of expectations, it was boosted largely by aircraft orders. Core business spending actually fell –0.2% in the month.

Data outside of the factory sector was mixed. The ISM Non-Manufacturing Index pulled back slightly after hitting a record high this fall following hurricane-related distortions. Some cooling here was welcome after unusual, perhaps unsustainable, strength. Fourteen of the 17 industries reported monthly growth. Construction Spending saw a strong gain in the month, led by strength on the residential side where a rise in single-family construction more than offset a decline in multi-family. Similar to manufacturing, housing sector data appears to have accelerated into year-end, a positive for fourth-quarter GDP.

December’s Employment Situation report saw nonfarm payrolls add 148k jobs. Though considerably less than the consensus forecast of 191k, the disappointment was partially offset by an upward revision of 24k to 252k for November, the strongest reading since July 2016. Unemployment was unchanged at 4.1%, a 17-year low. Average weekly earnings growth of 2.5% Y/Y was inline with expectations. Overall, this month’s report did little to change the recent narrative that labor conditions remain constructive.

Of Note

RBC’s global head of commodity strategy, Helma Croft, predicted on 9/05/16 with oil at $44 a barrel, that the price of oil would reach $60 in 2017. WTI closed at $60.12 on 12/29/17, its high for the year.

Market Indices Week of 01/05

S&P 500                  2.6%

Russell 2000         1.6%

MSCI EAFE             2.4%

MSCI EM                3.7%

Commodities     -0.3%

Barclay's Agg.   -  0.3%

US Dollar Index    0.1%

10-Yr Yield           2.48%

Oil ($/bl)              $61

Gold ($/oz)         $1,317

The Week Ahead

  • Producer Price Index
  • Business Inventories
  • NFIB Small Bus. Optimism
  • Consumer Price Index
  • Retail Sales
  • Jobless Claims
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